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?