Tax refunds: wise strategy or poor planning?

Posted by on April 10, 2014

If you are like many Americans you held your breath when you finished filling out your tax return this year, hoping for a refund (and if you haven’t finished your return yet, save this blog for after April 15th.) After completing all the forms you look at the bottom line and…great news! The IRS owes you money! But is this really a good financial strategy?

First of all yes, of course it’s nice to know that at least you don’t owe a lot of money. And a big refund one year, due to unusual circumstances, is not what we are referring to here. But if you consistently receive refunds you are loaning the government your income at zero interest. Why not adjust the withholding from your paycheck so that you keep more each week, and get less of a refund (or even owe a small amount). You could make wise use of that extra income: increase your 401(k) contribution or add it to an IRA or Roth IRA or use it to pay down debt. You weren’t living on this extra money before, so don’t just leave it in your checking account now. The key here is to utilize this extra money wisely.

 On the flip side if you usually owe money – not just a few dollars or a few hundred, but an amount that is hard to come up with – you are not withholding enough or are not making proper estimated tax payments. A meeting with a tax accountant can help you alleviate that situation.

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