It may seem like a great idea to expect a large tax refund year after year. Many people anticipate their refunds with plans to use them for vacations and other luxuries they otherwise don’t plan and save for in any other way. However, while you may be used to waiting once a year to a decent chunk of change, it is not financial a smart strategy for a number of reasons.
Reasons that You Should get a Small Tax Return
Here are several considerations to make if you do not alter your tax information to reflect having only the tax amount needed withheld from your check:
You Are Loaning to the Government for Free
When you pay in more than you need to, the government essentially gets to hold your money for free for a year. In return, you only get the money back. You do not get penalties or interest towards the loan paid by the government. But what happens when you owe money to the government for underpaid taxes? You are responsible for the interest and penalty fees that is accrued on the loan they have given to you. Surely there are better things you can do with your money than offer it out for free to the federal government.
Realities of Inflation
Inflation is the process of prices that keep rising while the value of money falls. The money you have today will be worth less next year. In this instance, the amount of money you are getting back from the previous year is worth less than had you had less taxes withheld.
The money you get back during tax time is your money. But it is money you could have accessed all along and not had to wait for it. A better financial move is to auto-deposit $25 or $50 from every pay and save cash for big purchases. Stop waiting for an entire year to have the money that’s yours in the first place.
How To Prevent Refunds
Ideally, you want to be as close to zero as possible when you file your tax return. You want to not owe money to the IRS and you don’t want the IRS to owe you. Speak with your payroll department about the withholding category on your W-4 form. By altering the amount you have withheld, you will be able to bring home more in your check and pay less out in taxes. Your payroll representative should be able to help you calculate the right numbers based on your marital and family status.
This year make the necessary changes to avoid the refund and instead find ways to stash extra cash into a high-interest savings account to prepare for big purchases.
This guest post was provided by Back Taxes Help