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April 29, 2011

Income tax withholding

Estimates are that 75% of income tax returns filed will have a refund this year.  The amount of the refunds appear to be greater than in prior years.  Behavioral economists find that people appreciate a large refunds more than the same amount received periodically throughout the year.   
I have talked to many people that do not have any or adequate cash reserves.  Some have real concerns about about how they will fund their children’s college or if they will have adequate assets for their own retirement.  It seems surprising that the refunds are not used for these purposes.  Instead the refunds are used for luxury items.  
You should know whether or not you need to set aside funds to meet future expenses.  Tax withholding can be reduces to save the funds periodically or taxes can be overwithheld.  The important issue is how the amounts are used.  Future spending should be anticipated and prioritized.  Then needs should be funded followed by wants and the wishes should be funded.  

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