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December 18, 2017 | Posted in:

A Big Tax Refund is a Bad Thing

Seriously!  A big tax refund is a bad thing.  Sure, we all love to get a big pile of cash in one lump sum, but getting a big tax refund is not a good way to manage our finances.

 

A refund is your own money coming back to you.

Remember that a tax refund is not a generous gift from your dear old Uncle Sam.  It is a tax “refund,” not a tax “gift.”  This means that the money that comes back to you in your refund check is just a return of your own money.  You let the government hold your money throughout the year for free.  Though it was returned to you months after you paid it in to the government (likely through withholding from your paychecks), you didn’t earn any interest on the money.  You could have taken a little more home from each paycheck instead.

 

You gave up the right to use that money for many months.

When you regularly set aside money in a savings account you can pull it out at any time for any reason.  If you contribute to a vacation club account or a Christmas club account at a bank, although funds are typically only available for withdrawal once a year, they could be accessed in an emergency.  If you use your tax refund as your savings tool, however, you have no access to your money until after your tax return is filed and processed, and the refund is issued.  You cannot call the IRS in December and ask for your tax refund a little early because some financial hardship arose.

 

Refunds are often delayed.

In an effort to reduce fraud, the IRS and state taxing authorities are increasingly delaying the date on which they will begin to send refunds.  They are waiting longer and longer so that the other documents that can be matched up with a return will be in the computer system for cross-checking before issuing a refund.  Many states are asking for additional documentation proving a taxpayer’s identity before sending a refund.  Answering these requests and waiting for the state to process the documents can delay a refund for additional weeks or months.

 

I always get a big refund.  How can I fix it?

If you pay in all your tax through withholding on your paycheck, you could fill out a new W-4 so that your employer will begin withholding a more appropriate amount.  There are several on-line calculators that can help you decide how many exemptions to claim.

Need assistance with determining your W-4 Form? Try Abacus Payroll’s W4 Assistant

If you pay estimated tax payments, you should have a tax planning meeting with your accountant before the year is over to determine whether or not your fourth estimated payment (due in January) needs to be adjusted.

 

What if I end up owing money on my tax return?

Owing money on your tax return is not the end of the world.  In fact, good tax planning strategy is usually to pay in the least amount possible during the year and pay the balance in April.  The important thing is to pay in enough during the year to avoid any underpayment penalties or interest.  By waiting until April to pay taxes due, you have additional months in which to invest your money and let it grow.

 

But my tax refund is the only money I am able to save!

Not true!  If you are giving the government free use of your money all year and waiting for them to send it back to you, you could do much better for yourself.  Reduce your withholding, take more money home with each paycheck, and contribute the difference directly to savings.  Your spending money will be exactly the same, but you will have more control and opportunity for investing.

 

Year-round tax planning is just one part of your whole financial picture. Discuss with your accountant your short and long-term goals, whether it’s saving an emergency fund, a down payment, or how to minimize your tax liability each year, so tax moves can be made before it’s too late.

 

Contact our office for guidance in your individual situation.

 

Author:

Associate Partner
 
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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