For a lot of us, the good part of filing our tax return every spring is getting a sizable check back from the government— a great way to stash something extra in our retirement fund or send a nice payment to our credit card company that billing cycle.
Generally, a refund reflects the difference between the amount of taxes you owe and what you’ve already paid for the previous calendar year. Most of us get one because we’ve had more withheld from our paycheck than we actually owe— and so we’re just getting our own money back, after we file our return.
In fact, technically, you’ve actually been giving Uncle Sam an interest free loan for the past tax year, through the extra withholding on your paychecks. Picture handing your friend or relative the amount of that refund last winter and saying, “hey, hold onto to this for me till next March or April, okay?”
Hey, My Refund Is Too Large!
If you are getting a larger refund than you’d like (according to the IRS, the average is around $3000), it might more sense for you to have access to that money all year. I suggest siting down with an accountant (or other tax professional), or someone in your company’s HR department, to adjust your withholding information so you have less taken out of every pay period.
Many clients tell me it’s harder to save one large check, because they tend to feel flush and splurge it on larger items— big trips, expensive purchases for their apartments- that they wouldn’t have felt they could afford without that “windfall” from the IRS.
Of course, be careful when you start monkeying with those brain-teasing tax forms. You don’t want to claim too many exemptions (tax statuses you check off, that reduce the amount you’re employer withholds from your paycheck). Remember: you could wind up on the other end of things, under-withholding— and then you’d owe the government money next April 2013.
My Refund Forced Me To Save
On the flip side, some people appreciate the large chunk of change in the spring. It’s like a “forced savings” program at the end of the year in the form of one large refund check from the government.
To save the average refund, you’d have to put away $250 dollars every month for the entire year ($3000/12 months). And some folks find that they are more apt to spend a hundred dollars, here and there on discretionary items— whereas a decent sized check goes straight into their emergency fund or savings account.
Ask yourself: what works best given your particular spending habits and your household budget? Would you be better off with the money every month or in one fell swoop at the end of the year? It all comes down to finding a way to make the “extra” cash work best for you— and of course you can always change your mind for the following tax year.