Getting a Tax Refund is Not All It’s Cracked Up to Be
If you look forward to tax season because of the tax refund you feel sure to receive each year you file your taxes, you may want to rethink the celebrating.
This may come as a surprise, but the ideal tax situation is when you do not get a refund or owe any taxes to the IRS at filing. This means that you paid the exact right amount of taxes throughout the year to the IRS to break even.
Getting a tax refund means you overpaid the IRS throughout the year when you could have set that money in a high yield savings account to generate interest. In other words, that tax refund could be earning you more money, but instead you let the government borrow the funds throughout the whole year.
If you receive a W-2 from your work in January or February to assist in filing your taxes each year, you have the option to readjust your withholdings on your W-4 Form and resubmit it. If you do not know how to calculate the exact amount you should be withholding to optimize your tax planning, talk to a CPA or other tax advisor to help you re-evaluate your filing and complete the withholdings properly.
For business owners, especially “solopreneurs,” you can calculate how much tax you owe each quarter, set the money aside in a high-interest savings account, and then use that money you saved in the “tax savings account” to pay your total taxes at your filing deadline.
Even if you are not in a financial position to be able to pay these taxes at this time, it is never too late to start good saving habits. Set up an incremental payment system to pull the amount you may owe in taxes into your savings account. Set this up to occur automatically per pay period so that you don’t have to go into your account each time to process the transfer. Plus, this will help you establish a mindset of treating your taxes like any other recurring bill.
Why let the government have more of your money throughout the year when it could be in your pocket until it’s due?
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