We’re approaching the end of tax season here in America, which means you should either have received your tax refund already or you’re filing for it soon. Most of us are secretly crossing our fingers that we’ll stumble upon an extra grand while filing our taxes, but in reality, receiving a hefty tax fund might be a sign that something’s wrong with your finances.
Let’s talk about why getting a small refund is actually a good thing.
Big Refunds Mean That The Government Was Using Your Money
Think of it this way: if a bank accidentally gave you $6,000 when they loaned you $5,000, you’d get an extra grand to use without paying interest. That’s hugely beneficial. When you overpay your taxes and leave your money with the government, the same thing happens. You’re loaning out money without making any kind of profit.
If you had put less towards your taxes and accepted a smaller refund, you could have used that money to invest in real estate or stocks. Additionally, you could have put more money each month toward your loan payments, thereby increasing your net worth. Maybe you could have built up a bigger nest egg or paid those doctor’s bills when you needed to.
Refunds aren’t giveaways – the money was already yours. The government was just holding your extra payments until tax season rolled around. Why shouldn’t you just keep that money from the beginning?
You Should Never Rely on Your Refund
Many Americans go into “holiday debt” during the months of November and December. As a result, they look forward to their annual tax return as an emergency fund of sorts. The issue with this plan? Tax refunds can vary dramatically depending on numerous factors, including the economy, government, and personal life changes.
It’s a better idea to keep that tax money from the beginning and use it to build an emergency fund in a high-yield savings account. That way, you’ll have the money right when you need it without worrying about your refund’s arrival date.
How to Keep Your Tax Refund Small
Now that you know to avoid large tax refunds, let’s talk about how you can handle your money earlier on in the year to reap the biggest benefits. When you get your next paycheck, figure out how much your employers are taking out for taxes. They might be taking out an extra $100, which then contributes to your hefty refund.
Fortunately, this is an easy problem to solve. Visit your HR office to discuss changing your paperwork to take out the appropriate amount for taxes. Keep in mind that you definitely don’t want to pay too little towards your taxes. More than 21 percent of taxpayers didn’t have enough taken out of their paychecks this year. Leave an extra chunk of change in your tax payments to avoid owing money at the end of the year.
If you’re worried that you’re paying too much or too little when it comes to taxes, speak with a professional tax advisor. Finding out exactly how much you owe in taxes can improve your budgeting, help you get out of debt, and generally improve your financial picture.
To Sum It All Up
I know, getting a hefty refund after going through the arduous process of filing your taxes seems like a giant reward. If it happens, great! But next time, think about what you could have been doing with that money if you’d had it seven months ago. Would you have tackled your loans more aggressively? Would you have put that down payment on a house?
Big refunds aren’t all they’re cracked up to be, so don’t let the media or friends fool you.