So did ya get a big tax refund?  Yeah?  Wooohooo!

No, wait.  Hmmmm… Maybe not so good.  Wait a minute, do you mean that I let Uncle Sam have all that money all year?  When it could have been (at least) slumming in my savings account?   Hey, maybe I should fix that.

If you had a large tax refund, then your employer is likely over-withholding from your paycheck.  Your employer’s calculation assumes that you’ll use the standard deduction, so if you itemize, you’ll probably want to reduce your withholding.  The larger your itemized deductions (as a percentage of your income), the less you’ll want withheld.

Now I agree with Nina, over at Queercents, that it is nice to get a refund at tax time — much better than having to write Uncle a check — but you don’t need to drive your refund to zero, just bring it down a notch or two.  It’ll help your cash flow throughout the year.  Bonus points will be awarded if you set up an automatic investing plan to invest the tax savings every paycheck to take advantage of dollar-cost-averaging.

Luckily, it’s easy to change your withholding.  Download a W-4 or use the online calculator at the IRS website.  For most folks, the calculation is as simple as this: find your itemized deductions from 2008, subtract the standard deduction, and divide the result by $3500.   The result (rounded down) is the number of additional allowances you should claim.

An example:  In 2008, you had $20,000 in itemized deductions.  You filed as single (perhaps with teeth clenched in anger at Uncle Sam’s refusal to recognize your same-sex ten-year loving relationship).  The standard deduction for a single person is $5700.  Divide the difference ($20,000 – $5700 = $14,300) by $3500, to get 4.1, and round down to 4.  Four, then, is the number of additional allowances you should add to your withholding.  Add it to the standard number of allowances (from the first page of the W-4), which, for a single, is probably two, for a total of six.

If you expect a significantly different tax situation for 2009, for example, if you sold your home and decided to rent, eliminating your mortgage interest and property tax deductions, or if you are subject to the alternative minimum tax (AMT), be very careful about reducing your withholding.  It’s worse to owe Uncle money at the day of (tax) reckoning, and penalties may apply.   When in doubt, ask, or just leave your withholding allowances at the standard level.

Tags: tax refund, taxes, W-4

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