False Statement: Tax Refunds are a good thing.
When you get a tax refund its not free money or some sort of bonus (unless you get refundable credits). It's YOUR money that the IRS is returning to you because you overpaid them.
How? Overpayments happen from your withholdings or estimated tax payments. And although it may be fun to get money back, you really should have never given them the $$ to begin with.
So a true statement actually is: Tax refunds are a free loan to the IRS.
Hm…not the warm fuzzy feeling we were going for.
"But Kelli! I love the feeling of a tax refund!"
Okay cool. But what if you needed that money BEFORE tax season comes? Think of sudden health issues, down payment on a house, saving for a kids college fund, or always in my case: travel!
But here is the kicker: You cannot access this refund (aka your OWN money) until you file your return a year later. That’s right, this “loan” is over the course of a year and the IRS holds on to it no matter what.
So...you give the IRS a free loan AND they get to keep it until they are willing to let it go. Boooooooo
If I don’t get a refund then where does the money go?
It goes to you.
For W-2 wage earners, your paychecks will be larger because you’re getting your refund throughout the year.
If you still want the magical feeling of a refund, deposit the money into a separate account. Then cash it out when you file your return. Voilal! And its always there in case of emergency…or travel (just sayin).
If you are self employed, then it just stays in your pocket instead of going to the IRS. Leave it in your savings account, let it build until you have enough to make that equipment/training/whatever-you-want expense that you’ve been waiting for.
Here’s how to make this happen…
W-2 wage earners - check your withholdings and what you are claiming on your W4 form. The IRS has free withholding calculators to see what is appropriate - and/or talk to your CPA.
Self employed people - have your CPA adjust your estimated tax payments. Keep in touch later in the year so you can pay in less or set aside more so there are no surprises in tax season.
Please comment below if you enjoyed this post or want to learn more!
