People sometimes get the silly notion that a large tax refund is a GOOD thing. They think of vacations, cars, new phones, new toys, new gadgets, savings and more. But think again. There are a lot of people that plan on their refund each year for certain items (see aforementioned list), and they treat it like a “savings account.” They just LOVE tax time and think a refund is a good thing. However, a tax refund is really NOT a good thing. Let’s delve into this thought pattern a little more and see just how many silly mistakes you are making when you get an annual tax refund.
A Free Loan to Uncle Sam
A tax refund means you overpaid the government in your taxes and they owe you money. Essentially, you have lent them money from January of the year before to April (or whenever you file your taxes) interest free. In other words, you’ve thrown away interest AND been unable to spend your money for over a year. Let’s discuss the interest losses we take on a tax refund. When you consider that a savings account or CD with a modest 1% interest rate would yield an annual return of $10 per $1,000 of refund, you’ll agree that stuff adds up. A refund of $3,000 would mean losing out $30.
If you don’t think that’s a lot, go ahead and take out three $10 dollar bills from your pocket. Now go throw them in the nearest garbage can and leave them there. Hurts, right? Or, next time you’re at the bank get thirty $1 bills. As you’re driving to work each day, throw out $1 every day right out the window… a month later, let me know how you feel about it! Obviously, when we see cash loss, it drives home the point. If you wouldn’t throw away cold hard cash, then why throw it away in other forms?
But It’s MY Money
Finally, we must realize the loss of use associated with the government holding our money hostage until we file a return. And then it can take up to 6 weeks after for processing that payment. Have you ever been a little short on cash? Perhaps had the thought, “I could sure use some extra cash today?” Next time that happens, think of the government holding your latest tax refund in their hands while you scrounge for change in the sofa for your next coffee. Not such a good idea anymore, is it?
What to Do Next
Now you see the light. But now what can you do about it? In cases where you are an employee, you simply need to file an adjusted W-4 with your employer. This is the form your employer uses to withhold your taxes. It’s super easy to request one from your employer. Or simply go online to the IRS website and print the W-4 form. To accurately determine how much you should have withheld, use the IRS withholding calculator. This will tailor your tax withholdings to your particular situation and ensure that you are withholding just the right amount.
For self-employed situations, you will want to consult a professional tax expert to be sure that your estimated tax payments are correct. In any situation, you want to make sure that you are withholding the correct amount, not too much or too little. Trust me, you do not want a large refund even when you think you do.