If you’re getting a HUGE tax refund this year, you’ve made a major financial mistake. You just gave the IRS an interest free loan. Here’s how you can correct this right away. Hint: Your paycheck is about to increase instantly!
You Should Never Aspire to Get a Bigger Tax Refund
I used to be a bank teller…like a hundred years ago. I remember when people used to actually bring paper checks to the bank to cash or deposit…remember the dark ages before direct deposit?! At the time, I was a broke college student (studying finance), and I wanted to know how I could get a bigger refund. I began reading up on things…and what I discovered is…You should NEVER aspire to get a bigger refund. Here’s why.
Can you believe the average federal tax refund was over $3,00 last year?! (This fact comes directly from the IRS here, these are statistics for the 2015 tax year.) Let me rephrase that; over 36 million people made and average of $3,000 in interest free loans to the IRS in 2015! What if you had invested $3,000 in the stock market last year? The S&P 500 returned about 12% last year! Your $3,000 investment would have been worth $3,360 at the end of the year! (Learn How to Invest Your Tax Refund Here.)
How Would Your Family Use $3,000?
Even if you had not invested that in the stock market, how many other ways could your family use $3,000? This could be the fast track to building your emergency fund. Another way to use this money is to pay down debt. If you have a few smaller credit card balances, you could eliminate a few of them using the snowball method.
Adjust your W-4
The vast majority of us pay our income tax via tax withholding from our paychecks. Remember that W-4 you filled out with your new-hire paperwork? It may need to be adjusted. I found the instructions on the W-4 worksheet to be very confusing. In fact, the worksheet recommended that my family claim TOO MANY dependents! This is dangerous, because it would cause us to withhold too little from our paychecks.
I also know people who are claiming too few dependents on their W-4. If you are getting a big fat refund this year, and have been for many years, then you may need to adjust your W-4. If you are one of the folks who are receiving the average refund of over $3,000, what if you received that extra amount on your actual paycheck? If you receive a paycheck every other week, that’s an extra $115 per paycheck! This amount would be very meaningful to most families.
I encourage you to review your withholdings and adjust if necessary. TurboTax has an easy W-4 Withholding Calculator which was very accurate for my family. This is not an affiliate link, but a tool that I actually used and recommend. Be extremely careful that you do not under-pay! This could cause you to have a large tax amount due on April 15th and possible penalties!
Please, please, please, do not consider this blog or any post as a means of specific tax advice for your family. My hope is that I can share with you tips that have actually helped my family and that you may find applicable to your situation. Consult a tax professional for specific advice.
Free Tools from IRS.gov
IRS.gov is a wealth of information if you know what you’re looking for. They also have a W-4 Calculator, but I thought the TurboTax version was easier to use. Here is a link to a blank W-4 from the IRS website so that you can review your withholdings right away. You can fill it out online and print, then turn it in to your payroll office at work!
I hope you find this helpful for your family!