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UNNECESSARY? NOT WHEN IT'S YOUR MONEY

August 22, 2007

The Treasury Inspector General for Tax Administration reports that there are 8 million "unnecessary" returns filed annually. I don't think unnecessary means what TIGTA thinks it means:

Fifteen percent of the unnecessary tax returns filed did not generate a refund, while 85 percent of these returns were filed to obtain a full refund of withheld taxes.

That sounds "necessary" to me - at least if you want your money back.

The report does make a good point, though -- many young people have too much withheld:

More than one-half of those filing to obtain a refund were under age 21, and 76 percent of those under age 21 indicated they could be claimed as dependents on other taxpayers' returns. These taxpayers would have been exempt from tax withholding because they earned less income than the amount required to file a return and they could be claimed as dependents on other taxpayers' return.

The Moral? If you had all of your tax refunded last year, and you expect to have the same thing happen this year (for example, you know you won't make more this year), you can file a W-4 saying you are exempt from withholding. You have more take-home pay now, and you don't have to file a return next year. You can earn up to $5,350 ($5,150 in 2006) in wages before you have to worry about paying taxes, as long as your "unearned income," like interest and dividends, is under $850.

Learn more from IRS Publication 929, Tax Rules for Children and Dependents.

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