The Truth About Tax Refunds
Courtesy of USAA
We all know a tax refund means we paid too much in taxes. But few of us seem to mind.
IRS records show most of us have $40 too much taken out of our earnings every week. Why? We either don't know how many allowances to claim on our W-4, we'd rather overpay than write a check to the feds on April 15, or, we see it as an easy way to set aside funds for a vacation or big-screen TV.
But tax experts advise that the best thing to do is take home more of our pay and use it to slash debt or invest for the future. If you'd rather put your money to work for you, here are a few tips to help you get started:
Make the right claim
The number of allowances, you claim on your W-4 tells your employer how much tax to withhold from your paycheck. If you received a big refund last year, chances are you didn't have many. If you owed money, you probably claimed too many allowances.
To make a change, ask your employer for a new W-4 form. Use a withholding calculator, like the one at irs.gov, to help you figure out the right number of exemptions.
Or, seek expert advice from a certified public accountant, enrolled agent (a federally authorized tax practitioner), or CERTIFIED FINANCIAL PLANNERTM professional. IRS Publication 919 "How Do I Adjust My Tax Withholding?" at irs.gov also can help.
Pay yourself first
This year, millions of taxpayers loaned money to Uncle Sam. When spread over 12 months, the average refund comes to about $225 a month. That's money they could've used every month to save for financial goals.
But some people are worried they'll spend that extra cash. The key is to pay yourself first. Once you've changed your W-4 allowances, consider setting up automatic transfers from your paycheck to put those extra funds into a savings or money market account. If you don't see the money, then you probably won't spend it. And your money will be working for you by earning interest.
Listen to the experts
Joni Terens, a certified public accountant who built her California business on helping military personnel file tax returns, offers a simple piece of advice: Talk to a financial planner.
"Sure, there are good reasons for wanting a refund. Young families, for example, often don't have a lot of money so they like to get that lump sum for a down payment on a house or car," she says. "But if you sit down with someone who does financial planning, you can figure out a way to meet your goals without giving the government an interest-free loan."
And that, tax mavens agree, is the ultimate payback for hard work.
For more information or free financial advice, visit usaa.com.
USAA means United Services Automobile Association and its affiliates.