Tax Refunds Are Not Ideal, But Are Still Useful
Many people get excited around tax time. Who doesnít want a few extra hundred or thousand dollars in their pocket? The more, the merrier. Do you really understand how tax refunds work?
You may have read - or have been told Ė that getting a tax refund isnít necessarily a good thing. Having Uncle Sam send you a big windfall just means your employer over-withheld Federal taxes from your paycheck last year. Sure, you could have been doing other things with that money, like putting it in a savings account, investing in your retirement or paying off debt. You know what? Itís not too late to do any of that.
A tax refund may not be such a bad thing for someone who lacks the discipline to stash away $200 or more each month. Since taxes are deducted from your paycheck before you ever touch it, ďsavingĒ is painless. Plus, you canít withdraw the money on impulse and you might not even earn all that much interest by just contributing to a savings account or CD. Giving a 12-month loan to the IRS isnít the worst thing you can do with your money, especially if you wouldnít have done anything better with it throughout the year.
The key is not to waste your tax refund once you get it (and forget about refund anticipation loans). Remember that a tax refund isnít free money from the government. Itís money that you worked hard to earn, so you donít want to blow it. Instead, use the refund to meet some of your important financial goals like paying off debt, building an emergency fund, saving up a down payment, or saving for retirement.
While there are some very good things you can do with your tax refund, there are also some very unwise ways to spend the money, e.g. shopping sprees, vacations, new electronics, toys for the kids, and other things whose value drops significantly after youíve spent the money.
With so many exemptions, deductions, and tax credits, itís pretty hard to breakeven on your taxes. An accountant or other tax professional can help you figure out the exact amount of withholding youíd need based on your salary and deductions. Even that figure could change if your financial situation changes or if the government changes the tax rules. Get as close as you can.
If you typically get a tax refund and youíre having trouble making ends meet, consider adjusting your withholding so thereís a little more money in your paycheck. Having a couple extra hundred dollars each month can keep you from living paycheck to paycheck and ease up the tension in your budget. Just make sure you donít adjust too much. Otherwise, youíll end up with a tax bill instead of a refund next year if you donít pay enough in income taxes.