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I’m always amazed by the size of the tax refund most Americans get year after year. The average refund was $2,429 last year, up from $2,324 in 2007, according to the Internal Revenue Service.

I’ll lay heavy odds that this year’s refunds will be bigger, thanks to higher contribution limits for IRAs, deductions for non-itemizers for real estate taxes and disaster losses, and tax credits for certain home buyers (see pages 30-32, 34-35 and 61 of the IRS instruction booklet for Form 1040).

Bigger refunds, however, mean millions of Americans struggling in this lengthy recession unnecessarily overpaid taxes all year. Many have had — and probably still have — $200-plus a month needlessly withheld from their paychecks, potentially pushing them into credit card debt if not mortgage default.

The irony is that many of these taxpayers, suddenly impatient for their money, will pay hefty fees for short-term refund-anticipation loans.
A new report by the National Consumer Law Center and Consumer Federation of America found that about 8.7 million taxpayers paid more than $900 million in fees for such loans in 2007. Another 11.2 million taxpayers received a "refund anticipation check" in 2007 at a cost of about $336 million.

Then, if history is any guide, many taxpayers will use at least part of their refund to pay down debt they might have avoided if not for the tax overpayments throughout the year.

To be sure, many people who are entitled to refunds and sign up for refund-anticipation loans are low-income earners who qualify for the earned income credit. Even after zero withholding, they may get a tax refund (technically a refundable credit).

But it makes no sense for other taxpayers to scrape by all year and perhaps go into debt only to get their money back at the end — and without interest to boot.

Solution? File a new W-4 form with your employer so less money is withheld (check IRS Publication 919, available at www payday loans guaranteed no fax.irs.gov). Or, if you make quarterly estimated tax payments, pay less each quarter. The goal of smart tax planning is to anticipate your annual tax liability and get to April 15 without owing or being owed a lot.

That should be your goal also with the "Making Work Pay" credit Congress approved for 2009 and 2010.

You earn the credit at the rate of 6.2 percent of your work income, with the total credit capped at $400 a year for singles and $800 for joint filers.

Therefore, singles must earn $6,452 and couples $12,904 before they can get the full credit.

But if you have too much income, you lose out. The credit is reduced at the rate of 2 percent of modified adjusted gross income above $75,000 for singles and $150,000 for couples. (Thus, singles with incomes of $95,000 and couples with incomes of $190,000 get no credit.)

For those who qualify, this credit amounts to a rebate of the 6.2 employee Social Security payroll tax for old age, survivor and disability insurance until the credit reaches the maximum amount. Most workers will start seeing the credit reflected on their take-home pay shortly after April 1 as employers start using new IRS tables calling for lower withholding.

But if you have multiple jobs or anticipate too high an income this year to qualify for the credit, you may have too little money withheld. Again, the solution is to file a new W-4 form appropriate to your situation, and/or adjust your quarterly estimated tax payments.

AskHumberto@aol.com

2009, TRIBUNE MEDIA SERVICES INC.

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