A small tax refund is good
According to the IRS, the average 2021 tax refund was around $2,800. This seems great…but it’s not free money from the government, it’s your hard-earned money! The calculation is that too much money was withheld from your paychecks, and now the government is refunding your overpayment.
Example:
$4,000 Total tax bill
$6,800 Income tax withheld from paychecks
$2,800 Refund
A small tax refund is good! I recommend working towards a refund of $0 for the following reasons:
A smaller refund means more money in your pocket throughout the year. With a $2,800 refund adjusted down to $0, your take home pay would increase by $233 per month!
You can’t count on your tax refund to be processed in a timely manner. I have seen refunds take 6+ months to reach a bank account if something is askew on a tax return.
If you received a tax refund, you gave the Treasury Department a 1 year interest free loan.
The Treasury Department is not a savings account, therefore offers no similar benefits like interest or liquidity.
If you are receiving a large tax refund this year, I recommend increasing your emergency savings with the money, or adding the funds to a retirement account. Then, adjust down your income tax withholding and set up a systematic investment or savings plan for the amount that your take home pay increased. This way, the extra money doesn’t go to the government, it goes into a savings or investment account that you can access all year long!
Additionally, when getting a tax refund, do not use a refund advance. The bank providing the advance charges a fee to give you early access to your money. The need for quick cash can be avoided by adjusting tax withholding as previously mentioned.
One last important note; if you find yourself late on bills while at the same time receiving a tax refund, adjust your withholding immediately. Pay off bills with this year’s refund, then get ahead by paying bills on time with the additional money you are receiving each month.
Enjoy your extra take home pay!
This blog is for general educational purposes and does not constitute financial, tax, or legal advice. Please contact our firm for specific advice applicable to your personal financial situation.