Mar
10

Is A Large Refund a Good Thing?

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thebudgetprofessional.com_tax refund_irs_moneyDo you usually receive a tax refund? Is it normally a big one?

Depending on their financial situation, people often use income tax refunds as a savings account of sorts, and plan large purchases around a big refund. Often, a large refund is used to pay off credit card debt or catch up on bills.

Your Paycheck is a Little Short

Are you in a situation where there isn’t enough money left at the end of the month?

During the year, do you run up credit cards balances by charging normal living expenses? Do you only pay the minimum on your medical bills, and hope that will keep you out of collections? Are you only paying the minimum on your credit cards, and the balance is going up instead of down?

Do you often think, “if I just had a couple of hundred extra this month, I could stay ahead and not get behind?”

If this is the case, it may be time to rethink the large refund.

Does Your Bank Loan Money Interest Free?

Change your tax withholding and give yourself that couple of hundred dollars each month, instead of giving it to the federal government to use as they wish for a year or more. Put your money into your pocket instead. Don’t let the government use your money as a tax free loan!

A W-4 is Easy to Change

At this link you’ll find Form W-4, “Employee’s Withholding Allowance Certificate”. This is a fillable form you can fill out and print right from the IRS website, or you can print out the blank form and fill it out in ink.

Take the completed form to your company payroll department and instruct them to change your withholding allowances. Keep a copy for your records!

Follow the steps in the Personal Allowance Worksheet to determine the total number of allowances you should claim. Compare that number to what you are claiming now – if you should claim more, your refund will be smaller but you’ll take home more money on each paycheck going forward.

If you don’t know what your current withholding allowances are, look on your pay stub. Sometimes that information is printed on the payroll check stub. If the info isn’t there, call or visit the payroll department where you work and ask them to tell you the number you’re claiming as withholding allowances.

What happens if the number of allowances you come up with on the worksheet are exactly what you’re claiming now, your refund is historically a pretty good one, but you’d rather take that money home in your paycheck during the year?

You can always add an allowance or two to what you’re claiming now. You are not required to claim only the allowance total entered on the worksheet. You can claim 3 instead of 2, or 5 instead of 3. It will depend on what your situation is. Be careful here!

Personally, I like to see a refund less than $100, or even a slight tax bill of a hundred or two. I feel much better about giving the government $100 of my money interest free instead of $2000, $3000, or $5000.

 

Do you usually receive a large refund? 

Do you already have your refund spent?

Did you pay bills or go on vacation using your tax refund?

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Comments

  1. I’ve seen plenty of people buy toys (cars, electronics, etc) from their refund.

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