Is getting a tax refund a good thing?

Tax refund

We established in an earlier post that a lot of people will be getting a tax refund and it will average around $2800. That’s quite a big chunk of change. But is getting a tax refund a good thing? A lot of people think that if they’re getting a refund that it means they did something right or maybe they are somehow putting it to the government by getting money back. Unfortunately, that’s not really the case.

The money you get back in a refund is YOUR money! It means that throughout the year you’ve paid too much to the government. They’ve been nice enough to hold onto it for you all year and not give you any interest on it so that you can file a bunch of paperwork and get it back. In fact, since the government tends to spend more than they collect, the money they’re giving you back was probably borrowed from China. How’s that for scary?

Why wouldn’t you want to get a tax refund? Like I said before, you’re not getting any interest on that money. Plus, if you’re someone who has a hard time making ends meet each month it could be because you’re paying too much of your money in taxes only to get it back next April. That’s money you could be using to help pay off debt, invest for retirement, or save for college or a new car.

So how do you go about eliminating your tax refund and bringing more of that money home? Follow the steps below.

  1. Look back at the previous year’s refund amount. Do you expect any major changes in your life that might affect your refund one way or another? For example, are you getting married, having a kid, buying a house, etc. If so, you may want to use discretion later on.
  2. Take the anticipated refund amount from the previous year and divide it by the number of paychecks. If you anticipate getting a $1000 refund and are paid biweekly, that comes out to be about $38.
  3. Talk to HR or payroll and adjust your W4 exemptions until your paycheck amount increases by the amount you calculated in step 2. If you want to play it safe you can adjust your exemptions so only half of the amount you calculated is back in your paycheck. One important thing to remember: The exemptions on your W4 do not have to match the number of people in your family. They only tell your payroll department how much to withhold for taxes. I know, blah blah blah.
  4. If you need help calculating the number of exemptions you can go to Paycheck City and enter in your information into the calculator until it’s close to your current paycheck. After that, you can adjust the exemptions and see the difference it will make to your paycheck.

If all of that sounds too difficult and you get a huge tax refund, try increasing your exemptions by just 1 or 2. You’ll likely still get a refund next year, but at least you’ll have reduced it a bit. Then you can increase your exemptions by 1 or 2 the next year until you get your refund down to almost nothing.

Remember, tax refunds aren’t necessarily a good thing. If you get a tax refund this year, celebrate it by spreading your refund out across the entire next year!

Hopefully you’ve found this post helpful. If so, please share it with others. Have any questions, comments, or suggestions? Please post them in the comments below.

Featured Image courtesy of basketman / FreeDigitalPhotos.net

What are you going to do with your tax refund?

Taxes

According to the IRS, the average tax refund last year was about $2800. That’s a lot of money. Let’s look at that a couple different ways.

$2800 is the same as:

  • $233 a month
  • $116 if you’re paid twice a month
  • $107 if you’re paid bi-weekly
  • $53 if you’re paid weekly

That would be a pretty nice raise if you got that money in each of your paychecks. We’ll talk more about that in a future post. For now, let’s look at some ideas on how to use this year’s tax refund.

It’s always nice to get a big pile of money unexpectedly. It’s sad to find out after a while that it disappeared and you’ve got nothing to show for it. Below are some ideas on how you might use your tax refund this year.

  • Pay off some debt. Since you’re probably paying interest on any debt that you have, paying it off makes your tax refund that much more valuable by saving you interest every month.
  • Start or build an emergency fund. Emergency funds are far from exciting, but on the bright side, once you’ve got one, unexpected events aren’t such a crisis.
  • Put it in an IRA for retirement. You can start the year by cutting your tax bill for the next year by putting your refund right into an IRA. Whatever you contribute to a traditional IRA can be a deduction if you itemize your taxes.
  • Start a 529 college fund for your kids. Depending on where you live and in which state you start a 529 college savings plan, you can get a lot of great benefits that a savings account won’t provide.
  • Buy something big you’ve been looking at. If you’ve been planning to buy something like a new computer, furniture, or something else that isn’t exactly “cheap”, using your tax refund can get you that item that much faster. Plus, if you’ve saved money for that special item you can use it for something else now!
  • Plan a vacation. It may not sound like the most responsible thing to do, but paying cash for a vacation is better than putting it on a credit card.
  • Start a business. I’m sure you didn’t expect to see that on the list. If you’ve ever thought about starting a business but have always used not having the money as an excuse, now’s your chance. It may be the catalyst to make a dream come true.

Don’t let your tax refund (or any unexpected dollars) slip away. Make a plan for it, even if the plan is to spend it frivolously. At least you’ll know where it went.

How do you plan on spending your tax refund? Post your ideas in the comments below.

Featured Image courtesy of Arvind Balaraman / FreeDigitalPhotos.net