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I’ve written about how I hate tax refunds.

I want to share three ways I avoid getting one.

I’m not a tax advisor, CPA, or attorney. I’m just sharing what I’ve done in the past as an individual subject to United States taxes.

This isn’t tax advice.

In my experience there are two steps to avoiding a tax refund.

Step one is to have an accurate prediction of how much tax I will owe (or get refunded) at the end of the year and (this is the key) knowing this information before the calendar year ends when I can still do something about it.

The second step is to take action to influence how much tax will be owed at the end of the year. All while being careful not to owe too much.

It’s important to know the maximum one is allowed to owe in federal taxes and the state level as it could change.

In past years it was $1,000 at the federal level. If one were to owe more than $1,000 in taxes there would be penalties.

Step One: Know How Much Tax you will Owe (or be Refunded) in Advance

Most people don’t look at their taxes until the next year.

For example, right now, most people probably haven’t even looked at their 2016 taxes yet. When they do and they realize they will be getting a $2,000 tax refund, well there is nothing they can do now, except file their taxes as soon as possible to get the refund check.

But if one were to assess his or her tax situation in June of 2016, there would still be half a year to make changes.

So how do I predict how much tax will be owed at the end of the year?

There are several ways.

Use Last Year as a Proxy

At a very basic level, one could use the past year as a proxy.

Ask yourself, did I get an income tax refund last year? If so, ask, am I going to be making the same amount next year? Will I have the same or similar capital gain/loss. Will I be making similar charitable contributions?

If one’s tax situation last year is likely to be very close to what it will be this year then it makes sense there will be a similar tax refund.

This isn’t a very sophisticated approach but it is a start.

In order to make an accurate prediction of how much income tax will be owed more a more detailed and comprehensive approach is needed.

Use Income Tax Calculators

Last year I put together a complicated spreadsheet that basically enabled me to calculate my income taxes during the year.

But rather than reinvent the wheel manually like I did–it would have been better to use the prebuilt tools and resources available to calculate taxes due.

One could experiment with the TurboTax W4 Calculator. Armed only with a copy of the most recent pay stub, as well as some other information, like charitable contributions, capital gains/losses, one can tweek allowances to avoid getting a refund.

Turbotax also has something called Taxcaster.

I wish I had known about these last year.

They key is having tools available to predict how much tax one will owe (or have overpaid) during the current tax year, while a person can still make changes.

Another strategy I’ve used is to start my taxes in December. By December 2016 I had filled out most of my tax information in Turbotax.

Sure, I didn’t have 1099s, W2s or many other tax documents, but I can look at pay stubs to figure out how much my W2 will be, I can look at my brokerage statements to see gains and losses.

This allows me to make decisions when I can still influence my 2016 taxes.

Step 2: Take Steps to Avoid a Tax Refund

Once I have a good prediction of how much of a tax refund I’ll get based on income, charitable giving, capital gains, and other tax situations it’s time to do something about it.

Strategy One: Increase Allowances on the W-4 Worksheet

Increasing allowances on a W-4 reduces the amount of tax withheld from each paycheck.

The tools referenced above enable one to tweek withholding allowances to make sure some money will be owed at the end of the year.

If the max I’m allowed to owe at the end of the year was $1,000, I would try to owe around $500 or so.

This provides some wiggle-room, because despite best efforts, the tax situation could change and I’m only able to estimate what I think my taxes will be Maybe I’ll decide to give a big $1,000 check to the charity in December, or maybe I’ll suffer a large realized stock loss I wasn’t anticipating.

These are things that a taxpayer might not realize are going to happen until later in the year.

Strategy Two: Convert IRA Money to a Roth IRA

I think taxes will be higher in the future than they are now.

So when it comes to retirement accounts I prefer paying taxes upfront (when I think they’ll be lower) and then having that money grow tax free over the course of 40-50 years, and then be able to withdraw it tax free.

Thus I prefer a Roth IRA over a traditional IRA (and Roth 401ks over 401ks).

But employer’s tend to do company matching to a 401k which is pre-tax money. I’ve been in several jobs that had a 401k and upon leaving those employers I’ve rolled my 401k money into an IRA.

So if I know I’ve overpaid my taxes I will convert some of my IRA money to a Roth in late December.

This increases taxable income, but one can opt NOT to have taxes withheld during the conversion.

This tax is still owed of course, but the payment can be delayed until later in April.

So if I know I’ll be getting a refund I can use that as an opportunity to convert some of my IRA money to a Roth.

I did this last year. I was working a W2 job for a half a year, and then when my contract was up I had no job. So I’d been overpaying withholding taxes.

So I decided to convert a large portion of IRA funds to a Roth IRA to avoid getting a refund. If I had known I was only going to be working for half a year I would have increased my withholding allowances.

Strategy Three: Realize Some Capital Gains

You want to be smart about this.

I wouldn’t sell a winning investment just to avoid a tax refund, but if you’ve been thinking about getting out of a winning position anyway, doing so will increase your taxable income.

In the US short term gains are currently taxed as ordinary income.

Strategy Four: Give Money to Charity

This strategy doesn’t help avoid a tax refund, but it is invaluable if you have underpaid your taxes too much, because it is a way to avoid penalties (see page 51).

If I realize that I owe more than the penalty-free amount on my taxes, I’ll give some money to charity or make some additional donations or put some money in a Health Savings Account.

These contributions reduce taxable income and can be useful when avoiding penalties that can be assessed if too much tax is owed at the end of the year.

Similar to strategy one, you can also reduce your withholding allowances to have more tax withheld each paycheck, if you realize that you’ll wind up owing too much at the end of the year.

I Hate Tax Refunds

I hate tax refunds because they are an interest free loan to the government and I have better use for my hard earned money than the IRS does.

It’s vitally important to legally pay all taxes due and remain in compliance with all applicable tax laws. It’s just not worth trying to cheat the IRS.

But there are legal ways to reduce your taxable income and avoid getting a tax refund.

Avoiding a tax refund has nothing to do with cheating the IRS or evading taxes.

It’s simply a way to make sure you aren’t paying more than you’re legally required.

It’s also a way to make sure that you don’t pay the taxes you owe earlier than you’re legally required to do so.

The above strategies are merely things I’ve done in the past to manage my tax burden and isn’t advice.

But these ideas could spark some conversation when you speak to your licensed tax advisor and as you make your own tax decisions based on your own unique situation.