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States Delaying Tax Refund Checks

Less than two weeks ago, USA Today ran story about how states were going to hold tax refunds for months [3]. Barely a week later, New York announced that it has started delaying income tax refund checks, estimating that delaying refunds until April 1st will “save” the state about $500 million. New York joins states like Hawaii, where some residents won’t get refunds until August, and California, where residents are starting to get IOUs instead of refund checks.

We hope that state financial issues won’t extend until next year but if you want to be prepared (and they don’t pass laws preventing this), here are two things you can do to avoid this in 2011.

Adjust Withholding

If you owe taxes, this delay doesn’t affect you. If you are due a small refund, then this delay is inconvenient but it’s not a big deal. The key then is to adjust your withholding so that you have a small tax refund or a tax bill, that way you don’t really care if there is a delay in refund payments! Here are instructions on how to adjust your tax withholding [4] but do this with care as you don’t want to owe too much. If you owe too much, you may have to pay penalties and interest.

File Early

If you filed in February or early March, you might have gotten your return in before New York State decided to delay refund payments. If you were due a refund, this is yet another reason why you should file early! You get your own money back faster, you get to earn interest on that refund (even though savings account rates [5] have been low lately), and now you might avoid refund delays too!

While it stinks to have your refund delayed, it does spur on better financial behavior which is a bit like seeing a silver lining in a storm cloud.