Over 100 million Americans annually receive tax refunds averaging around $3,000. If you are among those who received a refund, you are probably celebrating. While some consider a large refund cause for celebration, it’s actually a financial mistake that becomes particularly costly for those who get refunds year after year.
What’s wrong with a refund you ask? Well, it means you’ve overpaid your tax all year. That’s actually your own money you are getting back and you made an interest-free loan to Uncle Sam. Such unintended generosity costs you more than you might imagine. Consider what would have happened had you instead invested $250 per month into an investment program rather than overpaying the IRS. Instead of waiting for a $3,000 refund in April, you would have had the refund plus investment earnings for the year.
The alternative is to plan your annual prepayments through withholding and quarterly estimate payments so they more closely match your projected tax liability for the year. Your withholding is generally adjusted by changing the number of allowances claimed on the W-4 Form you turn into your employer. The more allowances claimed, the less the withholding. However, be careful that you do not claim too many and end up owing Uncle Sam at the end of the year. You should always double check your payroll deductions once the change has taken effect to ensure the proper adjustment has been achieved.
Let this firm assist you in projecting next year’s taxes and adjust your withholding allowances. Please call for assistance.