When you get a tax refund, you may feel like you’re getting a nice boost of income to buy something new, put in the bank, or just enjoy. Many of us actually get excited when we find out we’ll be receiving a refund when we file our taxes each year.
However, getting a big refund isn’t necessarily something you should celebrate since it probably means you have been giving the government an interest-free loan and a tax refund is actually costing you money.
In this article, we’ll explain how you can adjust your withholdings so you don’t give the government an interest-free loan, as well as why getting a tax refund should be avoided at all costs and some strategies to help you keep more of your hard-earned money.
Why Getting a Tax Refund Is Costing You Money
Getting a tax refund is usually viewed as a positive thing, as it means you’ve given the federal government more taxes than you have to. But this also means that you are giving the government an interest-free loan for the months you’ve allowed them to hang onto your hard-earned money.
Essentially, when you file your taxes, you’re making a payment to the federal government. The amount you owe is based on your income level, tax liability and other factors related to your unique situation.
If you get a refund, it means that you’ve actually paid too much in taxes throughout the year and the government was essentially holding on to your money for free all year long. In addition, you missed out on the opportunity to invest that money in other things, such as retirement, a vacation, or your savings.
Additionally, if you have a refund offset due to a prior year’s unpaid taxes, the penalties and interest add up. Plus, you may even end up paying the late fees associated with your refunds and other costs.
Why You Should Avoid Getting A Refund
When you get a tax refund, you could also be wasting money due to the time you spend preparing your taxes. The time and effort you put into filing can add up, so it’s important to take steps to minimize the hassle of filing your taxes each year.
Moreover, refunds can cause emotional distress if the amount isn’t what was originally expected. And, you’re missing out on interest that you could have earned on the money had it been left in your bank or invested.
If you are getting a tax refund, that money should be thought of as part of a savings plan; not something you get to enjoy. In other words, you are borrowing from your future self by getting a refund and you should think about the future consequences of such a choice.
Also, it’s important to keep in mind that if you are getting a refund or even if your taxes are paid off each year, you are not building a financial cushion if an emergency arises. You’re simply giving yourself a false sense of security that you won’t need the money.
How to Avoid Getting a Tax Refund
The easiest way to ensure that you don’t get a tax refund is to make sure you’re not having too much taxes withheld from your paychecks. To do this, you will need to update your Form W-4, the form that your employer uses to determine how much federal tax to withhold from your paycheck each pay period.
It’s also important to keep track of your taxes throughout the year. Monitor your withholdings and make necessary adjustments if needed. Organizing your finances so that you know exactly how much you’re paying in taxes at all times will help to avoid over or under withholding.
You should also consider changing your filing status from single to married if you get married, or vice versa if you’re recently divorced. This can also help you save money by reducing or increasing taxes withheld from your paycheck.
Another way to ensure you don’t owe too much in taxes is to make sure to look for any deductions or credits you’re eligible for and make sure you’re taking advantage of them, since they reduce the amount of taxes owed. As with any tax product, it’s important to consult a tax professional that can assist you with understanding the deductions, credits and adjustments available to you.
Getting a tax refund may seem like a great way to scoop up some extra money, but it’s actually costing you money. You’re lending the government money interest-free and missing out on potential periodic investments that can help increase your net worth.
It’s important to make sure you’re withholding the right amount each pay period, so you’re not stuck with a huge tax bill or a huge refund. By adjusting your withholdings and checking for deductions and credits, you’ll be able to maximize your refund or avoid getting a refund completely.
The key takeaway is to adjust your withholding and check for deductions and credits so you don’t overpay in taxes or in other costs related to getting a refund. With a strategic approach and some basic knowledge about taxes, you can keep more of your hard-earned money.
