In the past couple of years, a couple of factors have led to me having significant amounts due for my income taxes after filing my return every year. Chief among these factors is the fact that I had my W4 worked out to withhold as little of my check as possible, to allow me to receive the largest paychecks possible. This was a flawed approach, since when tax time came around, the four-digit number of dollars that I was on the hook to pay would take me several months to pay in full, completely blowing any kind of benefit of "me having the money to get interest," because of late fees and punitive interest.
So, early in 2007, I adjusted my W4 in a reactionary fashion. My paychecks went down by about fifty or sixty dollars a check, and life went on. Then, in March, I bought a home. I have since paid the mortgage, along with the hellaciously weighted interest that goes with the first ten years or so of a home loan. I didn't find out until after I'd been paying this interest for several months that: 1) anything extra I pay gets thrown at the principal balance, and ignores interest, and that 2) all the interest I pay is tax deductible.
So, I started throwing another $100 a month at my mortgage, a number I will increase when I start making a little more money, or when I pay off my car, which should happen this year. In addition, I started to pay attention to the interest I'd paid, knowing now that I could deduct it, and my eyes widened. By the end of 2007, I had paid roughly nine thousand dollars in interest.
So, not having received all my important tax documents yet(three forms for interest income on savings accounts, one W2, and one form for the deductible interest on my mortgage), I plugged in what I had and what I knew on H&R Block's Taxcut website. I found that from the information that I had so far entered, for the first time since the 90s, I'm entitled to a refund, on both my federal and state returns, in an amount roughly equivalent to three full paychecks.
So! In a couple weeks, I'll have a pile of money, ensuring that my ski trip and my Southeast Brewtrip will be well-funded, and will not dip into credit at all. I'm wondering now, however, if I should scale back the W4 changes I made last year, about a month into the year. You see, my income is only increasing by about $2500 in 2008, and with a full year of mortgage payments, I'll be paying about $12,000 in interest, instead of the $9500 or so I paid in 2007.
All this shapes up to an even bigger refund in one year, which I'm hesitant to eliminate. The uses for a large sum of money at one time are myriad, and toward the beginning of the year, it's always a good idea to set one's affairs in order, as well as one can. But I do have a question.
I've paid all my taxes and done everything right, but I thought I heard or read somewhere that even though I've paid all my taxes, that a substantial refund can be taxed itself as income for the following year. Can anyone confirm this, and account for its blatantly corrupt nature, should it be true?