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A lot of people eagerly anticipate finding out whether or not they’re owed a tax refund, because sometimes that amount is quite sizeable, and it can feel like an exciting windfall.
However, it’s easy to forget that a tax refund isn’t a bonus check from the government. It is simply your money being returned to you, and it is money you could have potentially had all along if your withholding had been set up more accurately.
The trouble with a tax refund is that, though it is eventually given back to you, it was not being put to good use – not being invested and certainly not growing. In other words, it was sitting stagnant. The government is not the best steward of your God-given resources.
A big refund check may feel thrilling, but the goal should actually be to carefully steward your own money throughout the year. You don’t want to be “loaning” it out to the government! Rather than getting a refund all at once, having a few extra hundred dollars in each paycheck throughout the year will most likely help you stay on track to achieve your financial goals. This is even more true if you have debt that accrues interest. Why pay someone else interest while lending the government your money for free?
Have you heard, “slow and steady wins the race?” Slightly larger paychecks over the course of a year will most likely make more of a difference than a refund. The temptation with a refund is to spend it all at once on a lavish purchase, whereas slightly larger paychecks are more likely to be used for investing or saving.
Instead of loaning money to Uncle Sam for free, you could use that money to start healthy financial habits in saving and investing. Whether it’s putting the extra money away for an emergency fund or contributing to your retirement, the habits of savings and investing are powerful tools towards building financial health.
All of this said, it’s important to ensure that your life circumstances match your withholding. The goal is to avoid a return and to avoid having to pay big! Take a look at your most recent paycheck. You should be able to see how much your employer is withholding. If this amount is too high, they’re overpaying the IRS, which explains the refunds each year. If you’re not sure whether or not your withholdings are too high, an advisor can help you!
If your employer is withholding too much, you will need to fill out a new W-4 form to adjust your withholdings. You can utilize the Tax Withholding Estimate on the IRS website to give you a head start. It may feel overwhelming to take a close look at your taxes and potentially change your withholdings, but with the help of your financial advisor, it is completely doable! And, it’s a decision that could pay off big in the long run.
Don’t let the government borrow your money interest free! Instead, take charge of your withholdings and claim the money that is rightfully yours throughout the year. Not only is the financially savvy… but it’s also a practice in good stewardship.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.