Seven things to do with your tax refund

/ Source: Forbes

So, you've given your money to Uncle Sam interest-free for a year, and you're delighted to get a fat refund. Now what?

First, you should recalculate your withholding to avoid the same mistake next year — unless you consider it your duty as a citizen to be taxed through the nose, and then give the feds free use of your money for a year.

If you like getting a fat refund, you're not alone. Last year, the Internal Revenue Service (IRS) issued checks for 101 million refunds totaling about $215 billion. The number of refunds this year is expected to be about the same, but the total amount refunded is projected to increase slightly.

The IRS says the average refund this year is $2,371 — up from $2,182 last year. However, this year's average is likely to drop a little as the April 15 filing deadline approaches because those anticipating fat refunds file early, while those expecting a piddling amount let things slide.

Lest you think no one in Washington is paying attention, the IRS reports:

  • About 132 million tax returns were processed last year, and about the same amount will be handled this year.
  • About 61.5 million tax returns were filed electronically last year, and the total is expected to exceed 50 percent for the first time this year.
  • Last year, about 14.5 million people filed electronically from a home computer. So far, the total is up 22 percent over last year.
  • The most frequently asked question at phone-in IRS service centers is "Where's my refund?" To track yours, go to and click on the line on the right side of the page titled (you guessed it) "Where's my refund?" Have a copy of your return handy, because you need to punch in some detailed information to assure privacy.
  • The IRS collected $1.952 trillion in 2003, down slightly from the $2.106 trillion collected in 2002. Totals for 2004 aren't yet available, and the IRS doesn't make projections for the current year's collections. But one thing is constant: Congress spent it all — and then some.

It's a good idea to file a new W-4 with your employer to adjust withholding if you pocketed a large refund, owed a significant amount, got married or divorced, had a baby or if your child can no longer be claimed as a dependent for tax purposes.

Some people intentionally over-withhold on the theory that it's an enforced savings plan. Bad idea. Check the interest rate on the extra amount withheld by the government for a year — it's zero, zilch and nada. That's like stuffing a fistful of dollars under the mattress for a year, but without the romance, metaphorical or otherwise.

If you have difficulty saving, consider an automatic deposit of your paycheck into both your savings and checking accounts. The interest on a passbook savings account will be low, but it will be 100 percent more than what the government pays on the amount over-withheld.

Do the math. Small steps can build a hefty savings account over time. Even $25 per week adds up to $1,300 per year. That's $13,000 over ten years, plus interest. Think what saving $100 per week would total.

Check out the savings plans at major banks, such as J.P. Morgan Chase, Citigroup, Bank of America and Wells Fargo. Don't forget the regional and small banks because the little guy sometimes offers savers a better deal.

And remember: Interest rates are rising, and that's good news for savers.