Each January, without fail, millions of people anticipate receiving their W-2 forms from their employers so they can file their taxes. The internet is filled with memes making fun of the tax refund ballers that get excited and splurge using this “free money”. I mean, who doesn’t love a lump sum of free and unexpected money from the government right?? 

Well, in reality, if you get a large refund from your tax return…then you’re not making the best decisions with your money!  

And here’s why… 

#1. Good ol’ Uncle Sam….he’s horrible with money and in severe debt. Each US Citizen has an amount of money that Uncle Sam wants us to pay….but some of us tend to pay a little bit more than necessary. This extra money is like a loan we’re giving to the government with at a 0% interest rate. Luckily, he pays us back that extra money every year at tax time…but not with any interest attached to it. So essentially, a tax return is us getting our money back that we overpaid during the year. So it’s really not free money…it was ours to begin with.  

In fact, the IRS refunded $255 Billion in 2014; which is an average of $3,000 or $250/month for anyone who filed their taxes. Which brings me to #2… 

#2. That extra money we overpaid and are so excited to get in our refund check…should have been ours to begin with. So essentially, you’re missing out on approximately $250 (or more) per month from your paycheck. I recently read a study that said 69% of Americans have less than $1,000 in their savings account. I’m pretty sure $250/mo can make an impact on people’s lives if spent/used/invested wisely. 

#3. Speaking of being wise….we all know that car dealerships and shopping malls are filled with people around tax time. That’s because you’re more likely to spend the whole lump sum because you think it’s “free money” that you can just blow. Hopefully, it’s been established that it’s not free money. Some people would still rather receive their extra money in one lump payment versus in each paycheck. Why is that? Because they aren’t good at saving money! Well, I suggest creating a budget versus having the IRS save for you. I’ll even throw in a free session to get your started on your budget. Click here to schedule a call. 

So how can you avoid overpaying each year? 

The truth is….its complicated. The tax code is over 70,000 pages and they WANT you to be confused so you can over pay. So getting to a break even point with the IRS can take some time…but you can get pretty close! Use this IRS withholding calculator, answer the questions, and you will get an estimate on how much your withholding should be from your paycheck. Each year, identify how much you were over or under, and adjust accordingly.  

Click here for the link to the IRS withholding calculator.

My personal goal is to owe less than $500 to the government and no refund. Because refunds mean we’re losing money…and I am NOT about losing and being dumb with money!! 

If you have questions or need help with your taxes, please feel free to contact me

Pam The CPA

 


Comments

01/16/2017 9:59pm

I am an accountancy student and I find your post very interesting. I can compute tax too. I remember my professor way of teaching for us to become a fast learner. I do really appreciate your post. I chose to study accountancy because of my father. He is now a professional lawyer and at the same time an accountant in a prestigious company.

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I never thought that tax refund is bad like this. It never comes to my mind that a large refund for a tax return is not making a good decision for my money. So maybe I have to lessen my expenditures because after reading this it is already clear in my mind. Refunds are not a beneficial thing because it also makes us lose money. Overpaying is really sort of hard to distinguish. I know that car dealership and shopping malls are also the one of the most taxable. Maybe budgeting is going to be important and I have to be mindful of my spending.

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