If you are going to receive more than $500 as a tax refund, you have been giving an interest free loan to the government.
Many people get excited while waiting for their big “windfall” after filing their taxes. They think it is a gift from the government…it’s not!
A tax REFUND means that you overpaid and they are giving it back to you! It’s not extra money that you’ve earned, it’s the money you have already earned and gave to them to “hold on to” until you ask for it back. Then they return it to you without paying any interest.
Here’s an example for ya: You receive a big, fat tax refund of $5,000 this year. Woo Hoo! But guess what? This only means that you overpaid the government $5,000 or $417 a month. That is $417 that you could have had in your pocket each month. I hope you’re thinking, “That money could have helped me pay off my debts or fattened up my savings account!” If that’s what you’re thinking, we’re now on the same page. 😉
What can you do to change this? First, calculate how much tax you should be paying each year. You can use the IRS Withholding Calculator to help figure this out.
Once you figure out the amount of taxes you will owe, adjust the allowances on your Form W-4. The IRS Withholding Calculator will tell you how many allowances to take.
Every year you should run the calculators to figure out how much you will owe that year. Then, you can make the adjustments to your W-4 and begin putting the extra money you will start receiving into your savings or towards paying off your debt.