Now that it’s tax season, are you like the 75% of American workers who will receive a tax refund this year? Or did you find yourself writing a big check to Uncle Sam after your tax forms were all filled out? Most workers should try to avoid either of these extremes, and have their employer withhold just the right amount of tax throughout the year. Here’s why:
Getting a big refund
It’s undeniably gratifying to get that tax refund in the spring. It arrives like an extra springtime bonus and it makes you happy, so why isn’t it always good idea? First, you should remember that your refund check is your own money that you have lent to the government interest-free over the course of the tax year. If you had claimed more allowances on the W-4 form that your payroll office has on file, then your paychecks would have been bigger. You would have had that extra money in your pocket throughout the year.
How you can save on interest
If you’re like many people, you may be planning to use your tax refund check to pay down credit card debt or pay off a car loan. You could have paid these same debts off sooner if you had chosen to receive larger paychecks throughout the year. Paying debts off earlier means you pay less interest in the end, so you would actually come out ahead by having less tax withheld from your paychecks.
Investing your own money
If you really feel attached to the springtime lift you get from having access to a sudden chunk of cash, think about doing your own investing instead of having the government do it for you. If you fill out the W-4 form with the right number of allowances, so that your employer withholds only about the amount of money you actually owe to the IRS, you can set aside a portion of each paycheck throughout the year and choose your own investment. By taking charge of saving your own money, you will earn interest and you can cash out your investment in the spring anytime you want and make your own windfall happen!
When a larger refund is a good idea
Some people know that, despite their best efforts, they are not disciplined savers. If you’re one of these people, you may find it easier to simply let your employer withhold extra money from your paychecks, and rest assured that you have what amounts to a zero-interest enforced savings plan. If you know that bigger paychecks would just mean you’d buy yourself more designer shoes and fancy coffee, you may as well let the money stay out of reach until you get that big refund chunk next spring. Sometimes that choice can turn out to be the wisest one.
Think over your personal spending habits and level of discipline, and make a proactive decision about withholding for the 2014 tax year. It’s always OK to go to your employer’s payroll office and ask to fill out a new W-4, and you can even go online to the IRS Withholding Calculator to help you figure out the right number of allowances.
Haven’t filed your taxes yet? If you are still looking for a service to use, we recommend H&R Block to make sure you get the biggest refund. If you want a cheaper service that still makes filing easy and efficient, you should check out TaxAct.