The IRS reported that approximately 118 million Americans received tax refunds in 2013 averaging around $2,640. The average refund this year is expected to be even higher. If you are among those who received a refund, you are probably celebrating. While some consider a large refund to be a cause for celebration, it’s actually a financial mistake that becomes particularly costly for those who get refunds year after year.
What’s wrong with a refund you, ask? Well, it means that you’ve overpaid your tax all year. That’s actually your own money that you are getting back after making an interest-free loan to Uncle Sam. Such unintended generosity costs you more than you might imagine, even at today’s low interest rates. Consider what would have happened had you, instead, invested $220 per month into an investment program, such as a mutual fund, your credit union, an IRA, etc., rather than overpaying the IRS. Instead of waiting for a $2,640 refund, you would have had that amount plus investment earnings in your account—with no waiting. Or you could have paid off any outstanding debt and reduced the interest you paid during the year. If you historically receive refunds each year, you have forgone years’ worth of investment income or paid far more interest on debt than you needed to.
The alternative is to plan your annual prepayments through withholding and quarterly estimate payments so they more closely match your projected tax liability for the year. Your withholding is generally adjusted by changing the number of allowances claimed on form W-4 you turned in to your employer. The more allowances claimed, the less the withholding. However, be careful that you do not claim too many allowances and end up owing Uncle Sam at the end of the year. You should always double-check your payroll deductions once the change has taken effect to ensure that the proper adjustment has been achieved.
If you need assistance projecting next year’s tax and adjusting your withholding allowances, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
