Are you one of those people that has the highest amount of taxes withheld from your paycheck just to get a huge tax refund at the end of the year? Then you need to read through the three reasons why getting a big refund on your tax return is bad tax planning.
It’s Your Money
Yeah, it might be fun for a minute getting that big lump sum of cash. But it was your money all along.
Getting a big refund means that you overpaid in taxes. Plain and simple.
Sadly, it seems like a lot of people that get big refunds think that they are getting “free” money from the government.
Or unfortunately, the other half of people getting huge refunds are okay with treating the government like a savings account…
That earns ZERO percent interest!
Actually, less than zero percent. You LOSE money by letting the government hold onto it when you consider inflation.
When you finally make the connection that it was your money all along, then it should hopefully motivate you to try to break even on your tax return.
A Tax Refund Is An Interest-Free Loan To Government
If you’re okay with letting others hold on to your money interest-free, then I’d be happy to help store your money for a year. I promise I’d spend it more responsibly than the government.
That’s absurd, right?
You’d never loan out your money for nothing in any other situation.
So, why is it okay when it comes to your tax return?
When you give an interest-free loan to the government, you are basically saying that I trust the government to spend this money better than I can throughout the year.
YOU NEED YOUR MONEY!
Wouldn’t you enjoy getting more of a paycheck every pay period? Don’t you think that you can find a better way to spend that money than the big wigs in Washington?
I would sure hope so.
If you’re not confident in your spending habits, then please click here to start building your monthly budget!
Inclined to Poorly Spend Large Tax Refund
Speaking of poor spending habits…
Let’s talk about how people that get big refunds spend their money.
Because it usually isn’t wisely.
When you get a big refund, you more than likely have the mindset that this is “found/free” money and not earned money.
We psychologically think differently about “free” money than we do earned money.
And typically, people get big eyes for fun and unintentional spending when getting lump sum payments.
So poor spending decisions are usually made with big refunds.
Whereas if you would’ve received that money throughout the year in your paycheck you will probably spend it more responsibly and intentionally.
Now I know this isn’t everyone, some people do put the money toward their intentional spending or savings, and that’s great. Although you still need to adjust your withholding and be intentional throughout the year instead of just on April 15th.
How To Fix Your Withholding
Again, the goal is to get as close to breaking even as possible. This means you don’t get a huge refund and you don’t owe taxes.
Getting anywhere from $200-$300 either way (refund or owing) is close to breaking even in my book. Especially if you have other variables on your tax return aside from just W-2’s.
To fix your withholding you need to adjust your Form W-4 and turn it in to your employer or HR person.
Don’t know how to change your Form W-4 or where to start?
No problem.
The IRS actually has an income tax withholding estimator on its website.
Click here to head to the IRS website and start getting your tax withholding straightened out!
You will want your most recent pay stub for yourself and your spouse, if applicable. If you have other variables on your return, like a business, stocks, etc. then also have your most recent statements on hand.
Then go through all the questions. Once you get to the end, there will be a sliding bar for you to determine how much of a refund you would like to receive.
Once you select your amount. Which I would put either zero or $100-200 refund for a little cushion. Then you will want to click the Form W-4 link within the “How to Adjust Your Withholding” section.
Finish filling out your basic information on the form, then print and sign the Form W-4. All that’s left is to turn the form over to your employer or HR person for them to update your withholding.
It’s as easy as that!
**Please be aware that if you adjust your withholding anytime throughout the year, then you will need to readjust your withholding at the beginning of the next year to determine the appropriate full-year amount. This tool is designed to correct your withholding for the remainder of the year.
I hope this helps you understand why you need to keep your money throughout the year instead of letting the government hang on to it.
If you don’t feel confident that you can spend your money better throughout the year, then please stick around the Better Than Yesterday blog, so that you can start building the confidence to get better with your finances!
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