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.
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