Financial Friday Newsletter
Tax time is approaching, and I can’t wait to get my refund. Recently, a friend told me that getting a large refund isn’t a good thing. Can you tell me why?
For many people, tax refunds are something to look forward to. Why wouldn’t they be? It’s exciting to imagine all the things you’ll be able to do with that money. As much fun as it is, your friend is right – getting a tax refund isn’t ideal. If you receive a refund, it means you’ve had too much withheld from your paycheck.
That means you’ve essentially given Uncle Sam an interest-free loan on money you could be using every month to pay bills, buy groceries or get closer to your financial goals! Instead of aiming for a refund, a better strategy is to try to break even – ideally, you don’t have to pay the IRS and they don’t have to pay you.
First, figure out how much you should actually be withholding. Grab your last pay stub and explore the IRS withholding calculator to help you determine how much tax should be withheld from your paycheck.
Next, talk to your employer’s HR department as soon as you can to adjust your withholdings by completing a new W-4 form. This one step could mean more money in your pocket every month; that’s like giving yourself a raise.
If you’re like many people who use their annual tax refund to kick-start their savings or pay down debt, it’s important to know there’s a better way to maximize your money. Instead of waiting for the IRS to write you a check at tax time, take full control of your finances by cutting out the middleman. Once you’ve adjusted your withholdings, continue living off the monthly amount you were previously bringing home and put the “extra” to work for you.
If paying down debt is your goal, commit this money to debt reduction by implementing the debt snowball. If padding your emergency fund ranks high on your priority list, consider having this “extra” income automatically deposited into an interest-bearing savings account at a bank or credit union and watch your money grow. This time next year, you’ll have a nice amount saved, plus the interest it’s earned.
For more information about income taxes, tax forms and withholding, visit IRS.gov.
