Refund. Sounds like a good thing, right? But should a refund really be your goal each year when it comes time to file your taxes? Our answer might surprise you.
In short: no. Getting a refund shouldn’t be your goal each year when Tax Day rolls around.
Why. Receiving a tax refund means you’ve been overpaying the government through tax withholding or estimated payments throughout the year. Essentially, you’ve been loaning the government your money, interest free. Do you really want to be loaning the government extra money throughout the year?
Getting a tax refund is not a bonus. It’s basically getting money back that you have already earned but gave away throughout the year.
The discipline to save can be challenging for many people, so a quick influx of cash once you’ve filed your taxes can seem really appealing.
But follow this for a minute…
What if you open a high interest savings account and deposit your estimated additional withholding there instead? You’d earn some extra interest, plus have enough set aside to pay any taxes due when the time comes.
The “perfect” tax situation is to not owe nor receive a refund.
To do this, it’s important to make an accurate calculation of how much you think your tax liability will be for the year. You can use the IRS’s tax withholding calculator to find out what that might be or hire a professional to help you determine exactly how much to withhold and claim.
THE BOTTOM LINE:
If you’ve been thrilled to get a refund every year since you’ve been filing taxes, it might be time to rethink your strategy. Stop loaning the government interest-free money throughout the year. It’s time to reevaluate your tax planning.