Besides the above, keep in mind there is always the opportunity cost if you legitimately need money at some point.
Lets say I adjust my withholdings so that I break even over the year, versus getting a big refund. I put that money into some crappy saving account getting me <1% interest, but it is available immediately.
My HVAC units breaks. I need major surgery. A family member has a crisis and needs financial help.
I have that money available to help now.
This is versus taking it out of my emergency fund, costing me earned interest. Or worse, putting it on a credit card, costing me accrued interest til I get my tax refund. Or worst of all, if I am really financially inept like so many are, go to one of those cash advance places for a short term loan, costing me an arm and a leg til I get my refund check.
So not only are you giving the government an interest free loan, but it is costing you money if the country is in an inflationary period with regards to currency. Granted putting those funds in a savings account may not completely negate inflationary losses, it is still better than being at a definite loss. And again, the money is available right now if you need it, avoiding the above penalties.
And if somehow you do your taxes and it shows that you owe? Guess what. The government has basically given you an interest free loan that whole time! Plus you have til 4/15 to come up with the money. (assuming the amount owed doesn't exceed the penalty threshold)
If you're relying on a tax refund to save your ass in case of an extreme crisis you're doing it wrong.
Two words, emergency fund. You should typically keep three to six months worth of living expenses tucked away. I understand what you're saying about not taking it out of the emergency fund, but that's what it is for, right?
Well I just got the last piece of our tax puzzle (wife's W2) and after entering it and daycare info (can't enter childcare when the spouse doesn't have a W2 and is not a FT student!), CT owes us like $30 and the fed owes us about $700. Not sure how the $700 really came about though.... will have to look into that.
BTW I only started "paying attention" to W4's and "refunds" when a few years back I wound up owing like $2500 to the fed - I filed our W4's per the instructions and got hit with a "pay me" from the fed come tax time. Since then I've taken a more active role in tweaking our W4's to minimize cash transactions at tax time. Also I've taken a much more proactive position in reducing tax liability (e.g. maxing out my 401k and putting the wife in a 403b again).
You should be able to very easily estimate large deductions - estimating is pretty easy if you understand how taxes *work* and so long as you don't have any strange/unusual deductions, etc.
Also although it's not as responsive, you can do year over year adjustments.
Some deductions are not that hard to estimate, other aren't. I had an FSA in 2011 and unexpectedly had to pull my kid from school, so I opted to go w/o the FSA for 2012. Of course I got hit hard because I had to fund the childcare expenses with post tax funds when we decided take her elsewhere, so I will probably get a significant chunk back from this alone.Then there are the surgeries in 2012 whose deductibles alone exceed the standard deductions (also funded post tax). Just some of a myriad of dynamics that make the determination process a little harder. I am sure I will get a better hang of this as I look into the options more especially with all the tax changes coming.
BTW I also ran into the problem you list with regard to child care deductions but with wife at home going to school PT. Silly move by the IRS IMO.
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