Most people get excited about tax refunds, right? What’s not to love about getting a check in the mail? I understand why people get excited because it essentially feels like free money.
Here’s the catch: your tax refund is not free money. It’s money that you authorized the government to withhold from your paycheck. It’s money that you loaned the government, interest-free, for a year. Would you loan anyone else money interest-free? I wouldn’t! Neither should you. This is why you should aim to have no tax refund every single year.
If you had that extra money each month you could invest it and end up with more money at the end of the year instead of blowing it on something when you get your refund.
When you start a new job you get a W-4 form and you are asked to fill out your withholdings. Starting a new job is overwhelming and not many of us want to sit down and take the time to do this paperwork correctly. Doing so is worth your time and can save you tons of money. It’s easy to forget that a life changing event, such as marriage, a new baby, or divorce, means you need to change your W-4 withholdings.
If you are having trouble figuring out the math, check out the IRS withholding calculator. This website is awesome and it takes all the guesswork out of the equation.
Another thing you can do when filling out your W-4 paperwork is to have the government take out more money. Why would you want to do that? You would do this if you know you will owe the government money. Tom and I have done this in the past and it has worked out very well. I’ve been the crazy lady with a calculator out in staff training who is trying to get my W-4 withholdings down perfectly. I’ve even done it down to the penny.
Doing the math correctly on your W-4 can save you a huge headache. Owing money is never fun and neither is loaning money interest-free. This is the first full year that I haven’t worked so I’m sure after we look at our taxes this year we will need to revisit our withholdings. That’s okay. I view it as a work in progress and I know it will never be perfect, but that doesn’t mean we can’t attempt to make it better each year.
If you find yourself paying too much or getting a big refund, take the time to revise your W-4 forms so you don’t go through this next year.
People who are self employed have it a little more difficult with the W-9 and backup withholding. In these cases, I’d personally recommend saving money from each paycheck in order to pay taxes at the end of the year. The IRS has a fabulous informational page for self-employed individuals. I also like this self-employed tax calculator that can give you an idea of how much you should be saving for taxes.
What about you? Do you love your refund? Will you revisit your W-4 form after reading this?
I absolutely love getting my refund back every year because it allows me to put money into savings, college funds etc. However, the year before last (towards the end of the year) I began takign college classes again. Now I have a few small loans that I need to pay off…Would changing my witholdings help with that?
Good for you for putting the refund into savings! That is great and you should be very proud of yourself.
Since your loans are accruing interest it would be best for you to take home more money from each pay check and apply that money towards loan payments instead of getting that money back at a later date. Or put that extra money each month into an interest bearing savings account, either way you’d be investing instead of sitting on money that isn’t growing.
I hope this helps!
Another great option to avoid getting too much money withheld is too use prior year’s tax return. Use the amount you end up paying, and divide it by 12 months, plus a little bit more. As an accountant, I know that most of the payroll systems allow a deduction by flat amount or %.
Having too much money withheld by the government is never a good deal, however I know for a fact that individuals that are not good at all at saving money use this a a forced way to save, and see their reimbursement as a bonus check in April.
A refund does seem like a double edge sword for those who are not good with saving money. I still feel like it is a better option to pay off debt or save, but I understand that some people haven’t yet figured out how to be good with money.
Great article, Hannah. I would also add that you CAN change your W-4 several times throughout the year if need be, you’re not locked in for a year if you made a mistake or need to adjust it because something has changed.
The “take your return from last year and divide by 12” method never worked for me because we are a blended family with various child custody/living arrangements in place so our tax situation changes every year. Add to that changes in tax law, the ability to itemize or not (we haven’t been able to itemize in several years), changes in my husband’s income, kids growing up and phasing out of the child tax credit or not being dependents anymore altogether, and recalculating my husband’s W-4 at the very least every year is a necessity for us.
Can I also ass that when my husband was an “independent contractor”. we had to pay taxes 4 times a year or he was subject to penalties. I’m pretty sure it’s the same thing, still, (and should be covered in the package of information you refer to) so if you’re self-employed or considered “an independent contractor”, make sure to read the packet and pay your taxes when you’re supposed to, not just once a year. If I remember correctly, there were vouchers with specific dates that we had to use.
Jacky, I would make the generalization that those folks who aren’t good at saving money and think of that refund check as a “bonus” check probably also carry a balance on credit cards or have other loans that they have taken. If any reader recognizes himself/herself in that description, take the time to do the math, use the IRS withholding calculator, correct your withholdings on your W-2, and send that extra money on your paycheck to your credit cards or loans every month instead. Or maybe you can at least use the money to pay your ongoing bills instead of charging them if that’s what you’ve been doing.
Hopefully this article will help you take the step towards breaking the cycle of consumer debt.
Good points and advice Nathalie! I couldn’t agree more with your last paragraph.
ooops, I meant to type “add”, not “ass”. Sorry! I’m myopic in the mornings! Didn’t mean to offend. sorry if I did!
Lol, I figured! No offense taken.
i agree with you. Currently now we are self employed and we pay our taxes off at the end of the year. It seems best for us to do so, instead of paying quarterly and then getting your money back. We rather have more each month, than at the end of the year.
Melissa
I always assume I’m going to get a huge refund, and I never do. I’m hoping that means, at least, that I am doing the withholding thing right. I have to admit that I would love getting a big fat check at the end of the year, especially since I pay so much in taxes.
thanks for sharing! My husband and I are both teachers so on purpose we have more taken out so that we’ll get a little something this time of year. We usually pay off some sort of debt. We need to get better about saving Money!
This is very wise. I’m in Canada but this totally still applies..I hadn’t thought about it like this, but certainly will now! Thanks so much for sharing :-)
It’s good to know that this applies in Canada too! I always assume taxes are the same, but I don’t know anything about how other countries tax.
Our tax laws are different in Australia but you make a good point that the money is withheld from our income and subsequently “loaned” from us interest free! Come to think of it, they probably earn interest on it too! Haha. Thanks for linking up at Mum-bo Monday!
Right? They probably do earn interest off of us!