The average tax refund each year is always in the thousands of dollars. In 2009, the average tax refund was over three thousand dollars. That's $250 a month! Can you imagine what you would do if you had an extra $250 each month? Stop imagining because that's your money. You were just letting the Treasury Department hold onto it for a year.
[In pictures: 10 Ways to Improve Your Finances in 2011.]
Why should you adjust your withholding?
The core reason you should adjust your withholding is because you shouldn't be giving the government an interest-free loan. If you had that money through the year, you could use it to pay down any outstanding debts you may have. If you are carrying a credit card balance, you could use that money to pay down the balance and pay less interest. If you are carrying a mortgage, you could use the extra cash to pay that down.
If you are debt-free, you could be saving that money into an emergency fund or towards your next vacation! It doesn't really matter what you'd use the money for because it's yours and there's no reason why you shouldn't be getting it. If you were to save $250 a month for a year, earning just 1 percent interest (high-yield savings accounts aren't paying what they used to!), you'd have an extra $13 at the end of the year. While $13 doesn't seem like much, it's better than zero.
How does this happen? Our tax system is so complicated, there's no way that you could fill out a W-4 and expect it to be 100 percent accurate. The W-4's Personal Allowances Worksheet only has eight steps, our tax code is thousands of pages with all sorts of exceptions, exemptions, deductions, rules and regulations. We have huge refunds because an eight question form can't possibly capture all those pieces.
How do you adjust your withholding? First, you'll have to fill out another Form W-4 to give to your employer after consulting with the IRS Withholding calculator. The IRS calculator is the best way to calculate how to adjust your withholding because it integrates the myriad of recent stimulus bills into an easy to use calculator (and it asks you more than eight questions!).
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Why would you not want to adjust your withholding? For some people, the tax refund is a way of forcing themselves to save. Sacrificing $13 of interest is worth it if it prevents you from spending the money on things you don't want. When you adjust your withholding, you'll start to see your paycheck get a little bit larger. It won't increase to the point that you'll really notice it and, if you don't budget, it's easy to miss and never "realize" those savings. Another risk is that you'll withhold too little and have to pay taxes at the end of the year.
As long as you don't underpay by too much (safe harbor rules) you will not have to pay a penalty. That's why I always recommend the IRS calculator when people ask for resources on helping them calculate their withholding. So fire up the calculator, fill out a new W-4, and only pay the government what you actually owe.
Jim Wang writes about personal finance at Bargaineering.com. When he's not tackling money issues, he's usually looking forward to his next vacation and writing about it at Wanderlust Journey.
BRUSSELS – The European Union said Monday that the World Trade Organization found U.S. aid to Boeing Co. violated international rules — but both sides claimed to have won the latest round in the long-running subsidy battle between the Chicago-based plane maker and European rival Airbus.
The EU said the WTO report confirmed a preliminary ruling on the case made in September. That ruling came months after the Geneva-based trade body faulted European governments for illegally supporting local aircraft maker Airbus, a unit of European Aeronautic Defence and Space Co.
"This solid report sheds further light on the negative consequences for the EU industry of these US subsidies and provides a timely element of balance in this long-running dispute," EU trade spokesman John Clancy said in a statement.
The EU alleges that Boeing received almost $24 billion in illegal subsidies, such as research grants and free use of technology, from NASA, the Department of Defense, and the states of Illinois, Kansas and Washington. However, how much of this aid the WTO deemed illegal won't be clear until Monday's report is published some time this spring.
Boeing also claimed that the WTO had come out in its favor. "The WTO rejected almost all of Europe's claims against the United States," it said in a statement. "Nothing in today's reports even begins to compare to the $20 billion in illegal subsidies that the WTO found last June that Airbus/EADS has received."
That interpretation was echoed by the office of the U.S. Trade Representative. "The United States is confident that the WTO will confirm the U.S. view that European subsidies to Airbus dwarf any subsidies that the United States provided to Boeing," spokeswoman Nefeterius Akeli McPherson said in a statement.
The WTO body can't force countries to eliminate subsidies, but it can authorize retaliatory tariffs against products from countries that fail to comply with rulings. Considering past delays and future appeals in the Airbus and Boeing cases that stage is likely years away.
Trade analysts say the dispute will likely be resolved by negations between all parties. Their outcome could shape the future structure of the global aviation market, which is expected to be worth some $3 trillion over the next two decades and has attracted rivals from countries like China and Brazil.
Airbus and Boeing are trying to spin the WTO's rulings in their favor as they vie to secure a $35 billion contract to sell refueling jets to the U.S. Air Force.
The United States brought the dispute to the WTO in 2004, complaining that European governments supported Airbus with billions of euros in illegal subsidies. It filed the case after pulling out of a 1992 agreement limiting subsidies in the aviation industry. Brussels responded with a countersuit against U.S. support for Boeing.
The WTO ruled last year that Europe's "launch aid" to Airbus through virtually risk-free loans as well as infrastructure support, research and development funding and export subsidies from Britain, France, Germany and Spain broke international trade rules. Both the EU and the U.S. are appealing that case, in a public battle about who received more aid.
Airbus said that the WTO ruling backs its claim that illegal subsidies received by Boeing "have a significantly greater distortive effect than the reimbursable loans" made to Airbus.
Airbus estimates that it has lost at least $45 billion through lost sales and lower prices as a result of Boeing's subsidies.
"From today, Boeing can no longer pretend that it doesn't benefit from generous and illegal state subsidies. It has been doing so from the start and it's time to stop the denial," said Rainer Ohler, Airbus's head of public affairs and communications.
Airbus said it expects the dispute to carry on for "several more years," and that a negotiated settlement is the only way to resolve it.
Greg Keller in Paris and Chris Rugaber in Washington contributed to this report.
WASHINGTON – Americans spent at the fastest pace in three years in 2010, boosted by a strong finish in December.
Consumer spending rose 0.7 percent in December, the sixth straight monthly increase, the Commerce Department reported Monday. Households saw their incomes rise 0.4 percent, the same as November.
For all of 2010, consumers boosted spending 3.5 percent. That was the best performance since a 5.2 percent rise in 2007, before the recession began.
The government reported Friday that consumer spending rose at a 4.4 percent rate in the final three months of 2010 — the most since 2006 and helping retailers to the best holiday shopping season in that time.
Economists expect a cut in Social Security taxes will lift January's spending and incomes even further that last month.
But Paul Dales, senior U.S. economist at Capital Economics, said the boost could be short-lived without job growth.
For 2010, incomes rose 3 percent after having fallen 1.7 percent in 2009. Still, incomes grew at the second-lowest annual pace in the eight years.
The rise in incomes and the faster increase in spending meant that the savings rate dipped slightly in December to 5.3 percent of after-tax incomes.
The savings rate edged down slightly to 5.8 percent, from 5.9 percent in 2009. Still the 2010 figure is well above the low of 1.4 percent hit in 2005 at the height of the housing boom when rising home prices encouraged Americans to spend more.
The December spending gain was powered by a 1.5 percent rise in purchases of nondurable goods, such as clothing and food. Consumers boosted their spending 0.7 percent on long-lasting products such as autos and appliances. Spending on services rose 0.4 percent.
The increased economic activity is not leading to higher inflation. A price gauge tied to consumer spending showed prices outside of food and energy increased 0.7 percent in the 12 months ending in December, a record low.
Economists expect a slowly improving job market and a payroll tax cut will boost spending further in 2011.
The big question is whether the gains in consumer spending will be enough to offset weakness in the housing market and further cutbacks in government spending.
For all of 2010, the economy grew 2.9 percent, the best performance since 2005. That's a sharp contrast to the 2.6 percent drop in GDP in 2009, the worst decline in more than 60 years.