Those are not words most people like to hear. However, some people love tax time because it is better than Christmas. It is the time they get a windfall. Could this windfall ever be a problem? The answer is yes, it can be a mistake.
Let’s pretend Jane gets a $3,600 refund. Why would receiving all that cash be a problem? Let’s also pretend that Jane has some credit card bills and is paying 19.9% on the balance. What if Jane has seen the light and is now committed to eliminating credit card debt from her life? If Jane had received the taxes she overpaid to Uncle Sam each month, she could have paid down her credit card and saved herself hundreds in interest payments during the year. She would have also gained the satisfaction of seeing her debts decrease each month.
What is so wrong with her getting the money all at once? The advertising folks in America are comprised of some smart people. Each year about this time, they begin to fill our minds with the stuff we could purchase with our tax refund. Some people begin to think of this money as though it is someone else’s money. To them it almost seems like a tax refund is the same as an inheritance they received from a distant relative they did not know very well.
Most times, your refund is simply returning excess funds you sent the IRS!
The truth is, in most cases, the funds you receive in a tax refund are yours. They were yours all along. If you received a refund, you just loaned your money to the federal government over the year and now they are sending it back to you, the rightful owner. And to make it worse, guess what interest rate they pay you on the money you lent them for the year? You guessed it…0.0% interest. Now are you starting to understand why Jane would have been so much better to have used that money to pay down her credit card?
So now maybe you are beginning to understand that a big tax refund is not desirable. So, what can you do to change it? Are you beginning to see the light?
Your employer calculates your paycheck based on the information you provide them. If you have worked at an employer for quite a while, you may not remember completing a W-4, but once upon a time, you did. The manner in which you completed the form provided your employer with instructions for how much you wanted the federal government to take out of your paycheck for federal taxes.
If you have consistently received a large refund and are interested in reducing the amount you loan the government, you can do that by obtaining a new W-4 form from your HR or Payroll office. Changing your W-4 can be done at any point in the year and it can be adjusted more than once. So that you can study the form in the privacy of your own home, here is a link to the IRS form: https://www.irs.gov/pub/irs-pdf/fw4.pdf
I understand that tax forms look intimidating. Just take this form one block at a time. You can ask your HR or Payroll office to assist, but they may be leery of providing information if they believe you are seeking advice. No one wants to mess up someone else’s taxes. The good news is that if you make changes to your W-4 and if you decide the change is too dramatic, you can change it again for the next payroll.
If your circumstances are all the same (same filing status [married, single, head-of-household] same number of dependents, etc.) and if you have consistently had a hefty refund, you should be able to decrease your taxes withheld without too much risk of creating a situation where you owe taxes. For example, if like Jane, you have received a refund of $3,600, you could decide that you want to aim to decrease your monthly withholding by $200 a month. If everything is the same for you next year, you presumably would only receive a refund of $1,200 rather than $3,600 if you changed your deduction in January. This would allow you to do something more meaningful with the $200 like paydown a credit card or invest an additional amount into your retirement account. Afterall, it is your money in the first place!
What if you are just too nervous to adjust your W-4 withholding? You can still impact your life in a more meaningful manner by using your refund in an intentional, predetermined way. If you have credit card debt, consider using a small sum, such as $100, for a splurge and use the rest to pay down credit cards. If you have no credit card debt, (Congrats!) you could consider and IRA investment, the purchase of stock or making a special principal payment on your home.
Lastly, if you are likely to receive a refund, consider filing ASAP. You have loaned the government your money interest-free for more than a year now. Don’t procrastinate. Get your taxes filed and use your money in a way that benefits you! After all, your funds matter!