3 Reasons You Shouldn’t Receive a Tax Refund Next Year
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The weather is warming up, birds are singing, snow is melting and people are smiling. You know what that means? The tax refund season is in full swing.
I am always a little amazed when people pretend they just won the lottery or received an unexpected bonus when their tax refund arrives. I want to shake it and shout, "That was your money in the first place." I know certain people are deliberately asking their employers to withhold taxes from their paychecks so they can get a big refund every year. According to a survey by the American Payroll Association, nearly 45% of Americans say they would prefer a large refund to a larger paycheck all year round. As a result, the average individual income tax refund for the 2020 filing season was $ 2,549, according to the IRS. I say this is a bad idea.
Here are three reasons why you shouldn't get a tax refund next year:
Check Out: What Americans Do With Their Tax Refunds
1. You earn 0% interest on money you give to the government
If you have any kind of debt - credit cards, student loans, or a mortgage - it is better to repay those interest accounts than let Uncle Sam hold onto your money without interest.
For example, let's say Alicia has multiple credit cards with total balances of $ 15,000 and an average interest rate of 15%. If she gets the typical $ 2,549 refund (which could have been used to pay off debt), it costs her $ 382 in interest to overpay her taxes every year if she has credit card credit. Even if you don't have high-yield debt, you could invest that overpayment in your retirement account and earn compound interest.
2. You live from paycheck to paycheck
In my early 20s, I was in a hot mess with my finances. I lived in a constant state of stress because I had no room for my money. Any unplanned expense - car repairs, an unexpected vet bill, Uncle Joe's retirement gift - would blow my budget out of the water. But when the tax refund time ran out, I enjoyed a month or two of worry-free spending.
According to CareerBuilder, 78 percent of U.S. workers live from paycheck to paycheck, and I've coached countless clients in that situation. My advice: adjust the withholdings to minimize the amount of your refund so that the extra cash each paycheck offers relieves that stress. Using the example of the average refund of $ 2,549, that would add $ 212 more per month to your paycheck. I would much rather see you adjust your withholdings so that your reimbursement is very small so that you have more financial headroom all year round.
Find Out: Everything You Need To Know About Taxes
3. You can only access the overpayment after submitting it
If you don't have enough emergency fund to cover large expenses (medical emergency, job loss, home maintenance), you may have no choice but to rely on debt to cover it. Even if you've already overpaid your taxes by hundreds or thousands of dollars, you won't be able to access that overpayment until after tax time. Instead of overpaying your taxes, ask your employer to split your check and put the money into your savings account.
Here's the biggest objection I hear about not getting a refund: "I don't trust myself to use this extra money wisely." The solution is to set up automatic transfers from your paycheck or checking account to go straight to paying off debts or to a savings account. Do so when you get that first positive adjustment paycheck so you are not tempted to spend that extra cash instead.
Overpaying your taxes is like opening a savings account that pays zero percent interest and that you can only access once a year. Instead of getting a tax refund of several thousand dollars a year, adjust your withholding - with the help of your CPA or tax professional - and better use that money to make progress on your path to financial health.
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John Csiszar contributed to the coverage of this article.
Last updated: February 24, 2021
This article originally appeared on GOBankingRates.com: 3 Reasons Why You Shouldn't Get a Tax Refund Next Year
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