Many people think of spring as a special time for getting your income tax refund. We dream about how we want to spend it all year, on anything from a vacation to splurging on an expensive item we couldn’t usually afford. And why not? It’s an unexpected windfall from the government, right?
Wrong. It’s already your money.
A refund, by definition, is money that was ours to start with, returned to us. Refunds occur because we overpaid for something or return a purchased item to a seller. Either way, a refund is, rightfully, getting our own money back. Is getting a refund on income taxes that you overpaid a problem? Asked a different way; is it a problem when you must wait for repayment of your own money from someone who had no right to have it in the first place? When we put it like that, most people would say, “yes, that’s a problem for me.”
Getting a Tax Refund Is a Problem
While getting a refund after filing taxes is undoubtedly better than owing the government more taxes, getting a refund is not necessarily good. When you pay your monthly bills or buy groceries, do you pay just what you owe, or are you tempted to pay just a little too much, hoping that the vendor will later give you back what you overpaid? No, that would be silly, right? It’s also not helpful to overpay your taxes from your paycheck.
If you have a refund headed your way, that means you regularly overpaid withholding tax from your paycheck. Does the government save that money for you? No, they spend it. Then they must repay it to you as a refund. What you’ve essentially done is provided the government with an interest-free loan that accumulated throughout the year.
Meanwhile, the government earns interest on YOUR money while only paying back their original loan amount at refund time. You gain nothing, though you had to go without that amount all year long. That’s a bad deal.
Make Your Retained Income Work for You
Here are some better uses for the income you have been overpaying:
- Emergency fund – Put a modest amount of cash aside for unplanned expenses.
- Pay off existing debt – Save money on interest and fees by getting rid of lingering credit card debt, student loans, car payments, or other loans. This will boost your credit score, too.
- Short-term savings – Put aside special savings to cover a few months of living expenses if you temporarily lose your income.
- Retirement – Start or add to your retirement portfolio.
- Mortgage – Increase payments or payment amounts on your mortgage. Paying off a mortgage early can save thousands of dollars.
- Savings – By reducing or paying off debt, you can save more quickly for those items you wanted to buy with your refund. Paying cash when you have the full amount is always a big money saver.
When it comes to paying your income taxes, your goal should be to break even without paying more out to the government or getting a refund. Consult with Myrick CPA to ensure you have the proper amount taken from your pay throughout the year. We can also help with budgeting, debt elimination, and retirement planning. Get in touch with us today!