Conventional financial wisdom says that a large tax refund means too much money is being withheld from your paycheck. In a simple sense they are right. This is an interest free loan to the government. That refund check is paying you money that was yours all the while. So the wisdom says you should change your withholding.
I would guess that most people in this situation got here through inaction. All the best advice won't help if you are too busy and distracted by other things to get this item managed properly. These people know they can change things, but they like getting that big check, and doing nothing is easy. Well, there is another piece of conventional financial wisdom that these same people are also likely to ignore. "Pay yourself first". Savings should be a budget item. If you are ever going to scrape enough money together to buy a house, then you need some savings.
So the conventional wisdom isn't helping these people. But maybe they aren't doing too badly after all. Interest on savings is pretty low right now. So maybe that extra withholding is paying yourself first. This was a forced savings plan. When you don't see the money it doesn't hurt so much. That check is as valuable a home buying tool with or without virtue. So if I am talking about you, come April you can give me a call and I will help you figure out how much home you can afford.
There is more to this story however. I am not a financial or tax adviser, so the following is only an idea for you to consider and investigate. I believe you can get that tax refund early! You can change the withholding amount for every paycheck. So, the idea is you can change your number of dependents on your W-4 so that no taxes are withheld for a planned number of your next paychecks. Basically you are making up for withholding too much for the rest of the year. I believe, that as long as you calculate this right so you don't owe money this April, then this is within the rules. Now you can talk to me about buying a home now. You have more options and less down payment money needed this year than is likely to be the case in 2009. As long as the contract for purchase is accepted and the loan application is started before 2009, you can even close in early 2009, and still benefit from the current loan programs. There is more to this story, and I will write about it in a future blog post, but feel to call me, to get the story now.
The IRS has a tool for calculating your withholding. It is for "Employees who would like to change their withholding to reduce their tax refund or their balance due".
This calculator from paycheckcity.com will help you calculate what your take home pay will be with the values you have chosen for your W-4.
Photo from the Library of Congress National Photo Company Collection.