Why Getting An Income Tax Refund May Not Be The Best Use of Your Money

The holiday rush has come and gone and most of us are settling back into our normal routines as the new year moves forward. Tax season is upon us and for many individuals who look forward to a check from Uncle Sam it can be a much anticipated time of year. Are you one of the lucky individuals looking forward to a lump sum payment in the coming months? If so you may want to read further to decide if getting an income tax refund is really in your best interest financially.

Does everyone get a refund?

When tax season rolls around you will fall into one of three main categories. We have already mentioned the group that looks forward to receiving a refund. If you are not a member of this group, then you will either owe the IRS or you will break even in which case you will not have to pay additional taxes on your income and you will not receive any refund for taxes paid.

How are refunds determined?

You don’t have to be a CPA to understand the basic premise driving income tax refunds. Throughout the year you have taxes withheld from your earned income. Ideally your withholding amount would match your tax liability. If your withholding is too high, you will receive a tax refund; conversely if your withholding is too low you will owe the IRS the difference.

Money now or later?

You may be excited about receiving a big refund but you should ask yourself this question: How would having that additional money throughout the year affect your finances. In many cases the very people looking forward to receiving a check from Uncle Sam struggle throughout the year making ends meet or living paycheck to paycheck. The average income tax refund is just over $2,000. There are few people who wouldn’t look forward to receiving that amount of money but consider this: if you had the correct amount of taxes withheld throughout the year, you would have roughly $200 more per month in your pocket.

How to determine the correct amount to withhold?

You can visit the IRS website to locate a “withholding calculator” which will help you determine the correct way to fill out your W-4’s before turning them into your employer. You should also remember that you can and should change your W-4 at any time throughout the year if you experience personal changes that affect your finances. This can include marriage, divorce, the birth of a child, or the loss of a job.

Remember if you regularly qualify for an income tax refund you are not receiving a windfall. While it may feel like winning the lottery you are in fact simply receiving your own money that the government has held throughout the year without benefit of any interest you may have earned if you had access to it yourself. If you take a moment to think about how you can benefit from having your own money available each month throughout the year versus getting it back in one lump sum you might determine getting a refund isn’t the best use of your hard earned money.

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