Here’s why a big tax return is a problem and how you can fix it!
Something about the beginning of the year makes me start thinking about tax returns. I daydream about how much we’ll get back and what we can do with it. But if your tax return is so big that you’re making plans for how to spend it, that’s a problem!
You just gave the government a free loan
Would you ever loan money to a business interest-free?
Of course not!
Would a bank loan you money interest-free?
Nope!
With any loan, there’s a risk that the money won’t be repaid. The interest is your reward for taking the risk of loaning money.
When you receive a large tax return it means that money was withheld from your paycheck and handed over to the government to do with as they please for the year and then paid back to you. That’s called an interest-free loan.
As with any loan, there’s a risk the money won’t be repaid. Meaning, there could be a time when the government doesn’t pay you that money back. Not that this has ever happened in the US, but I’d rather keep my money in my own pocket and not worry about it.
There’s nothing wrong with loaning money to the government, but don’t do it for free. The government has various options that allow you to loan them money and earn interest on it, like savings bonds.
Give yourself a raise
Take your tax return and divide that number by 12. How would you like that added to your income every month?
Yes, please! I’ll take a free raise!
By actually paying your correct income tax you give yourself a free raise. All you have to do it fill out a simple form.
You can adjust your withholding
You can adjust how much income tax your employer withholds from your paychecks. Do you remember filling out a W-4 form when you started your job? I’m guessing probably not.
That form tells your employer how much tax to withhold- and you can submit a new W-4 form to them any time!
On a W-4 form, you claim allowances that adjust your income tax withholdings. The more allowances you claim, the lower your withholdings.
Now, don’t get allowance-happy and claim a bunch so you don’t pay any taxes. Underpaying is just as bad as overpaying. The government doesn’t appreciate it and will fine you if you underpay too much, not to mention you’ll end up paying your taxes in a lump sum at the end of the year.
I usually aim for my annual withholding to be within a hundred dollars or so of my owed federal income taxes. Meaning I overpay by a hundred dollars or so. That’s much better than overpaying by a couple THOUSAND dollars!
The year we had a baby, I forgot to adjust our withholdings for our new dependent. Our return was a COUPLE THOUSAND DOLLARS- ridiculous! I adjusted our withholdings and increased my paycheck by over $250- EVERY PAYCHECK. That’s significant money!
There are numerous calculators online that can help you determine what taxes you owe and how many allowances you should claim. I highly recommend the tax withholding estimator on the IRS website.
It’s so easy to adjust your income tax withholdings and give yourself a raise! Figure out how much income tax you SHOULD be paying and adjust your allowances so you’re paying the correct amount. Don’t loan your hard-earned money to the government for free!