For the umpteenth time, I have to rail about tax returns and big tax refunds as I always do at this point in the year! Right now is the time of year taxpayers are thinking about their taxes and that long awaited tax refund. Nearly 72% of taxpayers received a tax refund last year, and the average direct deposit tax refund was close to $3,000 according to the IRS. And that’s even in the real life case that so many filers feel like their tax refund was actually a little low.
But since I opened up the box, I now have to ask the question:
Why does getting a tax refund (of your own money) make you so happy?
As They Say on TV, “It’s your money, get it now when YOU need it!”
You’ve seen those commercials, haven’t you? The ones that declare that you can get your money now and not have to wait when you have a payout or annuity that typically would force you to wait over the rest of your lifetime! Well, this isn’t about that kind of payout. It’s about getting your actual pay every week when you actually earn it and not having to wait a whole year to get it.
I say it every year hoping that more and more of us will wake up, but it seems most of us just love getting a check back that is simply our own money paid back interest-free and should have been in our possession all along.
Why Are You Getting a Big Refund in the First Place?
Getting a big tax refund check from the IRS may seem like a great idea. You can always find a use for that money, whether it’s a big-ticket purchase, paying off a debt, or just adding to your savings. But by getting that big refund every year, you’re missing out on even more money.
It boils down to this:
If you’re getting a sizable refund just about every year and you’re having federal taxes held out of your pay, you’re probably having too much held out for federal taxes.
So when you get a huge refund, you’re just getting your own money back. True, it’s sort of a mandatory savings account that pays off once a year, but you’re still losing money on the deal. That’s because the IRS gets to use your money for most of the year, without paying you any interest.
Now I do understand that some self-employed folks have highly variable income and need to withhold extra to be sure they cover their taxes to avoid penalties. But that might be the only case where letting the government hold your money makes any sense.
Wouldn’t You Like to Get Your Money All Year Long Rather Than Waiting ’til Tax Time?
Whether you received the tax refund you deserved or think you could have gotten back more last year, the act of getting your own money back from Uncle Sam, and waiting a full year to do so, is just silly.
What do you have to gain? Try looking at it this way and just do a little math. Add up this year’s tax refund and divide by 12. That’s a ballpark figure for how much extra you could get in your paycheck every month all year long! Every month!!! So a $3,000 tax refund now means you could get an extra $250 every month if you make a few smart decisions.
That’s the money you need to pay down your debt or fund your IRA or emergency fund or even to take a well-needed family vacation next year!
Factoid: Some Money Now Is Always Better Than Some Money Later
Here’s where that “making money” thing comes in. Instead of letting your employer send money to Uncle Sam, just set aside that amount each paycheck into an account that earns you some interest. These days, that won’t be a lot, but a little is better than none, which is what the IRS gives you every time they issue you a tax refund.
How to Change Your Tax Refund Fate
Your employer may ask each year if you want to make changes to your withholding. But you can request a change at any time if you just fill out and hand in a new Form W-4.
It doesn’t matter what number you use to adjust your withholding as long as it doesn’t throw you into the very small number of those who actually wind up owing money to Uncle Sam. In those few cases, there could be interest penalties due on your tax obligation. But frankly unless you have a really unusual windfall of income that you can’t even imagine when you fill in your W-4, that isn’t really going to happen.
If you always get a big refund, and you’d rather have that money in your pocket every month, increase the number of personal allowances on the W-4 worksheet to have a tad less money taken out for taxes.
Just for the record, on the other hand, if you usually owe taxes every year, you may want to decrease the number of personal allowances. If you need help, the IRS has a withholding calculator that can help you figure how much you need to hold out. If you manage your withholding amounts correctly, you can earn more in your paycheck and still not pay any extra taxes at the end of the year.
What Else Might Make You Need to Adjust the W-4?
Other than when you’re consistently getting big refunds or owe a lot at tax time, it’s a good idea to review and adjust your withholding when:
- You or your spouse have more than one job
- You have children, get married or divorced, or buy a home
At the very least, think about adjusting your withholding if big refunds have been your way of life. The real goal here should be to come as closely to having a $0 refund or tax due as you can. If you do that, you have won this game and have joined me on the list of really smart taxpayers!
A Tax Tip: Don’t Itemize, File Using the Standard Deduction
Under the new tax law, more people will take the standard deduction instead of itemizing because the standard deduction has nearly doubled ($12,200 for single filers and $24,400 for married taxpayers filing jointly) and some tax deductions were either eliminated or reduced. In fact, the IRS confirmed that about 90% of taxpayers claimed the standard deduction instead of itemizing their tax deductions in tax year 2018, up from about 70% before the new tax law.
If you need the itemized deductions, by all means file that way. But, chances are, you won’t have to do that again. Although more taxpayers will claim the standard deduction as a result of the changes, and the standard deduction will help lower your taxes, you may find you can still itemize your deductions to get a bigger tax refund if you take a little time to gather up some of your receipts. If you are close to the standard deduction thresholds, don't forget about some additional expenses that may push you over the standard deduction. These expenses include qualified charitable contributions, casualty and theft losses if they are a result of a federally declared disaster, gambling losses up to gambling winnings, and points paid on a new mortgage or refinanced home loan.
Bonus Tip: Don't Forget About Refundable Tax Credits
A tax credit is a dollar-for-dollar reduction of the tax you owe, and a refundable tax credit will allow you to have a credit beyond your tax liability. The Earned Income Tax Credit (EITC) is worth up to $6,557 for a family with three or more children. But one out of five taxpayers who are eligible for the credit fails to claim it, according to the IRS.
Some taxpayers miss this valuable credit because they are newly qualified due to changes in their income. Or they chose not to file their taxes if their income is below the IRS income-filing threshold ($12,200 if you're single or $24,400 if you're married filing jointly). Never do that. Even if you have no children, you can still qualify for hundreds of dollars back as tax refund…even if you have paid no taxes to the government at all!
One last thing: contribute to your retirement plan and get multiple benefits. You still have until the filing deadline of April 15, 2020 to make a 2019 contribution to your IRA and reap the benefits of a tax deduction of up to $6,000 ($7,000 if you are 50 or older). In addition to this deduction, you may qualify for the saver’s credit. This is the only time the IRS allows you to double-dip. The IRS gives you an additional credit of up to $1,000 ($2,000 for married filing jointly) if you contribute to your retirement.
Final Thoughts
The best time to make these changes is always now. Because the sooner you do it, the sooner you begin to have more money and that money can be the start of your new savings plan, debt payoff machine, retirement fund, or any way you can reduce your debt burden. Stop worrying about the “how” and think now about the “when”!
Are you just being silly with your money and taxes? Is so, why? If you can’t save on your own, you’re doing it for Uncle Sam so why not do it for yourself? What would you do with an extra $250 a month in your paycheck?
