Early spring is a very exciting time for some taxpayers in this country, but is tax refund anticipation euphoria the best thing for taxpayers financially in the long run? The answer is usually no.
A tax refund often results from an overpayment of taxes withheld from your paychecks throughout the year to the federal, and or state governments.
Though tax refunds may feel like a gift, or even found money, they are in reality a repayment of the money you should have already had, returned to you free of any interest.
That is right, you essentially have loaned the government a portion of your income for an extended period of time at a zero percent rate.
Here is the important question, what could you do with the refund if you had it the whole time? You could have put the money in to a savings or retirement account and earned interest, decreased your interest expenses by paying down debt or even paid for preventive maintenance on your car or home.
How many of you have put off changing your squeaky brakes and ended up with worn out rotors? A dollar in your hand, is much more valuable than another dollar, if you have to wait nine months to have it.
If you receive a large refund each tax season, check your withholding allowances at work, and consider increasing them.
Increasing your withholding allowances reduces the amount of tax withheld from your paycheck, but be cautious, just as a large refund is not beneficial financially, either is a large balance due.
In fact, taxpayers can be subject to a underpayment penalty, to avoid this penalty, you must pay at least 90 percent of your tax liability for the current year, or at least pay what you owed the previous year.
I always advise my clients to try to arrange for their refund, or balance due, to amount to less than five hundred dollars at tax time.
This way you can avoid penalties, and maximize your personal cash flow during the year.
Your tax professional can assist you with advice regarding your W-4, or you can use a tax withholding calculator to help you adjust your withholding allowance.