Why you don’t want a tax refund

Tax filingAre you hoping for a big tax return this year?

About half of all Americans get a tax return and the average amount is a whopping $3000!

That sure sounds good, but what it really means is that those people have been overpaying the IRS about $250 a month.

Here’s how it works:

Taxes Owed – Taxes Paid = Refund.

So, let’s say you are having $500 in taxes withheld monthly from your paychecks. That adds up to $6000 in a year. You then calculate how much taxes you actually owe and determine you only owed $3264. So, the IRS refunds you $6000-$3264=$2736 of your own money.

Many people look forward to getting a tax return each year thinking of it as “extra” money or a freebie. For the majority of people, however, a tax return is just money they overpaid the IRS that’s being refunded back to them.

Your goal should be to break even every year on your taxes. This means you had the correct amount withheld from each paycheck to amount to your total taxes owed.

Now you might be thinking that this is actually a nice little way to force yourself to save money—but in actuality it is very bad money management. Just think about the lost opportunities you have for savings, paying off debt, or not going further into debt.

Here are some good reasons why you shouldn’t want a tax refund:

You are giving the IRS a free loan

when you over pay the IRS you are giving them an interest free loan. Your money is not working for you—it might as well be in a box under your bed for a year.

Having the money monthly is better for your budget

Having that extra money each monthly will help your budget. You can put it to good use paying off debt or putting it in a savings or investment account where you will earn interest.

You are more likely to waste a large tax refund

Few people spend their refund wisely. When that large sum is deposited into your bank account it can be easy to go spend it on a high ticket item that you don’t need and can’t really afford.

So, what should you do if you are getting tax refunds every year—if you are overpaying the IRS? Well, the first thing you need to do is determine how much money you need to have withheld from each paycheck. To do this, take the amount you paid in taxes and divide it by the number of paychecks you get each year. Work with your local tax preparer to determine how to adjust your withholding to break-even.

This will effectively inject money back into your pocket with each paycheck. The great news is that you’ve been living without that money for the last year. So, instead of frittering it away make a plan to use it wisely right from the start.

  • Set up an automatic payment against your highest interest rate credit card bill.
  • Pay extra each month on your mortgage or car loan.
  • Invest it in your 401k or retirement plan.
  • Have it automatically deposited into a high yield savings account.

In this tight economy, every penny counts so stop wasting money overpaying the IRS. Keep your money and put it to work for you!

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