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Why You Want a Small Tax Refund

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Uncle Sam Tax Refund

Every year millions of people wait anxiously for a fat tax refund check to show up in their mailbox. In fact, the average tax refund is close to $3000. Getting a check in a mail for three grand can be exhilarating, but getting back such a large refund could be costing you money. Some people think of a tax refund as some kind bonus from the government for being a good citizen, but the fact is that the money in your tax refund was yours to begin with. After all, it's called a "refund" for a reason.

When you first started your job, somewhere in the pile of papers you filled out and signed was a W-4. Form W-4 is used to determine how much of your paycheck should be automatically deducted each month to pay income tax. If too little money is withheld for taxes, you end up owing the IRS money on April 15. If too much money is withheld, Uncle Sam sends you a check for the amount that was overpaid.

The Problem With Large Tax Refunds

The problem with getting a large refund back is that you are basically acting like a one-person bank by giving the government a free one-year loan with your money. If you had that money in your pocket instead of the pocket of the IRS, you could use it to pay monthly expenses, invest, or you could spend it however you like.

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"But I I'll Just Spend It"

Some individuals use their tax refund as a method of saving money. They figure that if they had the money up front they would spend it on something frivolous, and by getting a large tax refund they suddenly get back all that money that they would have otherwise wasted.

While it makes good sense to save some of your paycheck each month, the IRS makes for a terrible savings account. To illustrate, imagine that halfway through the year you have an unexpected major expense, like the transmission going out on your car. You can't call the IRS and ask for the extra money you paid them to help foot the bill, and you can't wait until the tax season to fix your car. Saving the money yourself is a much better option.

Use Automatic Bank Transfers to Help You Save

If you are worried about spending the extra money rather than saving it, most banks and credit unions offer automatic transfer services that can automatically transfer money from one account to another at a set time each month. Each paycheck you can automatically have the money you would have overpaid in taxes transferred to a separate savings account. You'll be able to keep track of just how much you have saved up and will be able to access the money if you need it.

How to Get a Smaller Tax Refund

Filling out form W-4 is a lot like shuffleboard or curling - you want to get as close as possible to the target without going too far. If too much is withheld, you get a large tax refund. If too little is withheld, you end up owing taxes.

Ideally you want to estimate your taxes owed for the year as closely as possible, and have just enough withheld to pay what you will owe. If you don't owe any taxes and get $0 back, then the perfect amount of money was withheld from your paycheck each month. At the very least, you want the smallest tax return possible.

You could calculate your estimated taxes on your own, but there are many helpful calculators available online to help estimate W-4 withholding. TurboTax offers a W-4 withholding calculator that helps determine how many withholding allowances you should take to boost your take-home pay and minimize your tax refund.

Keep More of Your Own Money

Like it or not, we are required to pay taxes in the society we live in. However, there is no sense in giving the government any more of your hard-earned money than necessary. By minimizing your annual tax refund, you will keep more of what is rightfully yours. Save the extra money for a rainy day, spend it, give it to charity, or throw it out the window while driving - you worked hard for it, so you should decide what to do with it.



Apr 30, 2014 5:56am
Amen! Why more people don't see this is beyond me. I would go so far as to say I would prefer to owe a small amount each year rather than get a few dollars back. Essentially, this is how we can get the most utility out of our hard earned money.
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