Many people look forward to tax season. Once the yearly tax return is filed, they wait for their huge refund and plan on all of the things they are going to purchase with it. Many see this as an unexpected windfall. However, if you are one of those that count on a huge tax return each year, you are only hurting yourself.
Free Money to Uncle Sam
When you adjust your withholdings to allow for a huge refund in the spring, the money that is withheld from your paychecks has to go somewhere until you get it back in April. It sits in the government’s piggy bank, and the government is the lucky party that gets to collect interest on your earnings all year long. You could divert those extra funds to your own savings account and reap the rewards.
Lost Investment Opportunity
Some people try to justify their large tax returns by claiming they are an investment. However, if you aren’t earning any interest or dividends on this investment, it’s not much of an investment. Adjust your withholdings and put the extra money in a good investment vehicle that will give you greater returns.
When you are adjusting your withholdings, don’t go too far in the other direction. No one wants to owe the government at tax time – that defeats the whole purpose. There are several withholdings calculators online that you can use to help you figure out how much you should withhold from your paychecks so you won’t owe money at tax time, and the government won’t owe you money at tax time. You can also ask your tax professional for assistance with this task, since tax issues can be frustrating and confusing for many people who don’t deal with these issues on a daily basis.
Don’t let the government get free use of your money. You aren’t a bank. Adjust your withholdings and tax charge of your finances.