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IRS – I take back all the nice things I recently said about you…YOU STINK!

Or it’s probably congress who stinks, I’m not sure who, but basically whoever is responsible for IRS Publication 15 (Circular E – Supplemental Wages) THEY stink. This rule is going to cost us over $300 of our own hard-earned money.

The rule is regarding the tax treatment of bonus checks. My husband receives a once a year bonus check in March. According to the above rule, this check is taxed at a mandatory 25%.

As I’ve stated before our effective tax rate is a ridiculous 1.26%. I know, I don’t have a lot of room to complain with a tax rate like that, but we have deductible mortgage interest and property taxes, deductible student loan interest, crazy “city wage tax” and state taxes, three kids and are squarely middle class so it’s not like we are doing any creative accounting. ( I don’t even bother with our meager charity deductions because I feel I little guilty about this.)

I changed the w4 withholdings to 15 exemptions this year to no avail! The paychecks don’t have a penny of Federal Taxes withheld and we will still get close to $3000 refunded. The IRS will hold 23.74% of that bonus check in their coffers from March 2010 until we get it back in the form of a tax refund in MARCH of 2011.

In the meantime we will pay interest on credit cards with rates as high as 24.5%. In the past I didn’t care, I loved that BIG REFUND. But now that we are serious about no debt, and have a plan in place to get rid of it all, I’m a little miffed. Each time I make a “Debt snowball” payment (or “debt avalanche” payment to be more precise) I choke a little when I see how much of it goes to the interest and not the principal. That chuck of our money we have to wait a year for would really speed up the process and save us money in interest or go to beefing up the emergency fund which would earn interest for us.

Do you think I can invoice the government for all the accumulated interest we will pay over this year? I mean I don’t expect them to pay interest on tax refunds when most people who CHOOSE to CAN avoid them – but what if the IRS won’t ALLOW you avoid a refund?

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