Tax Refunds - A Good Thing, Right? Well...
Just a few weeks back, the IRS announced that refunds on early tax returns that had been filed through February 15 were running an average of $2,640, or about 16 percent smaller than the same time in 2018. This was contrary to what many were expecting, since they thought that under tax reform that kicked in last year, they were getting a tax cut and refunds would actually be larger.
Oh, the weeping and gnashing of teeth that occurred! Angry taxpayers took to social media using hashtags like #GOPTaxScams!
But what really happened? Had the average person's taxes actually increased rather than decreased? Was that why refunds were running lower?
Of course, for some, due to the loss of some deductions and personal exemptions, their total tax bill for the year actually did go up, despite the reduction in rates. But for most who found themselves in this "predicament", the reality is their total tax bite did actually go down.
The "problem" here was that, with the reduction in tax rates (and expansion of the tax brackets at which the lower rates applied), the IRS assumed most people would rather have their money sooner rather than later. Seems reasonable, after all, why give the government an interest-free loan until you file your tax return, right?
So, the IRS adjusted the withholding tables so that workers would have less federal income tax withheld from their paychecks, thus putting more money in their pockets each time they were paid. For many, what occurred was the reduction in withholding was more than the reduction in their ultimate tax, with the result that the refund was smaller than usual (or expected). Thus, the source of the grievance was born.
But consider this ñ is getting a large tax refund really a good thing? Would you not be better off having more of your hard earned money in your hands sooner rather than later? If your normal refund is, say, $3,000, think of what you could do with an extra $250 a month! If nothing else, maybe it gives your budget, and your bank account, a little breathing room.
So with that in mind, I urge you to consider adjusting your withholding downward so that it more closely approximates what your actual total tax liability will be, and by doing so, increase your take home pay. Then, here are some ideas of positive healthy ways you can use that extra money to invest in your past, present and future financial health!
First of all, if you are in debt, consider using the extra money to pay down and hopefully pay off, that debt. This is especially true of high-interest credit card debt. If you currently are only making the minimum credit card payment, you are virtually making NO headway at getting rid of that debt.
Using the extra money to get that paid off will take so much stress off of you and increase your financial well-being. The savings on interest alone will be astounding! Then you will be at a point where you can only charge what you can afford to pay in full each month, further avoiding the credit card trap.
Once you have the past in order, consider investing in the present. What do I mean by that?
One principle of good financial health is that you should have an emergency fund of some kind put away to help with the unexpected that inevitably occurs. You know, the car breaks down, your home A/C goes out, or you suffer a job loss.
Having a reserve can buffer against such events and help you avoid going into costly debt. A good goal is to build up a reserve large enough to cover three to six months of normal living expenses. You will sleep better at night, I promise!
Finally, invest in your future.
Did you know that if you were to start in your 20s investing that $250 per month, by the time you retire you could have close to $1 million? That's a 1 with six 0's behind it! A great way to do this is by funding an IRA or participating in your employer's retirement savings plan if they have one.
If you have children, another good idea is to put that money away for your child's future post-secondary education. You might consider a 529 plan for this, contributions to which, in some states like Arkansas, qualify for a tax deduction. For young children, that $250 per month put back for their education will just about pay for all four years of college tuition at most public colleges and universities.
Hopefully by now you get the picture that letting Uncle Sam keep your money only to have it returned in one large lump sum later is not necessarily the wisest of moves. Sure, it feels great to get that big check. But just think of how much better off you will be in the long run if you take home more of what you earn now, and then use it to invest in the past, present and future you!