So, you got a big tax refund, and you are doing the happy dance. It’s understandable that any financial windfall is going to seem like a good thing on the surface. Some people even treat their tax refund as a savings account and plan for its use throughout the year. But a large tax refund is NOT a good thing. Why is that?
A Large Tax Refund Is Something You Don’t Want
Why Loan The Government Interest-Free Money?
A large tax refund means that you gave the government too much money, period. They have been using your money all year, and how much are they going to pay you? Zero. Zilch. Nada. The federal government does not pay interest on excessive tax money, they merely (and grudgingly) give you back the excess at the beginning of the following year.
Your Hard Earned Money Has Been Held Hostage All Year
Have you had any tight months over the past year? Done without any purchases that you wanted or needed? If so, why have you been handing your needed money to the federal government in an interest-free loan? That was kind of you, but at some point, you might want to question these actions.
If that thought makes you uncomfortable, then consider the hoops you have to go through just to get YOUR money back. If you fail to file a tax return, you won’t get it. And even then, it will take up to six weeks to regain possession. In my opinion, there are better ways to manage your money.
Put Your Money to Work Instead
Instead of handing over your money, consider what would happen if you invested it instead. Even a modest savings account or CD with a rate of 1 or 2% will give you $10 or $20 for every $1,000 of tax refund money. That’s a few meals that you won’t get back.
Imagine taking several $20 bills out of your wallet and throwing them out of a moving car window. Would that make you mad? It shouldn’t because you do it willingly every year. It is worse than paying twice for something.
What Can You Do About It?
If you are an employee, adjusting your withholding is as simple as filing a new W-4. You can get this from your employer, or from the IRS website. To their credit, the IRS does have a free tool to calculate your maximum tax withholding.
The withholding calculator can be tailored to your particular situation, and it will determine your optimum withholding amount. You only have to use it.
If you are self-employed, you can talk to a tax professional to make sure that your estimated quarterly payments are correct.
If you are tired of giving the government a free loan of your much-needed money through the year, it is easy to correct. The important thing is to stop celebrating getting back something that is already yours. There are much better ways to save money and create your own slightly more massive windfall.