Millions of taxpayers receive refunds each year. But, it’s important to understand that a tax refund actually costs you money.
The government pays no interest on refunds. If your refund was in your hands throughout the year, those dollars may have been more productive.
How? You could’ve invested the money or used it to pay off any debt during the year.
If you added the money to a 401(k) plan, the tax could’ve deferred on both the investment and its earnings. Even better, your employer might have matched all or part of your investment, adding to your retirement savings.
You can’t use your tax refund until you receive it. Even though most taxpayers get their refund checks promptly, circumstances or errors can delay – or stop – a refund.
To manage a potential tax refund, consider reducing your withholding or estimated tax payments.
For most taxpayers, withholding must equal either the prior year’s tax or 90% of the current year’s liability. If your annual income changes little, it’s relatively easy to avoid overwithholding.
You should consider filing a revised Form W-4 withholding statement with your employer if you’re having too much withheld.
For taxpayers with fluctuating income or multiple sources of income, the problem is more complex. Try using the IRS’ Withholding Calculator to help you establish your withholding amount.
Have questions about tax refunds and withholding? Let’s talk!