Why Shouldn't I Get a Large Tax Refund Every Year?
Many people consider a tax refund a great way to save money or a nice way to get a bonus at the beginning of the year. But in reality you are giving the government extra money each month interest free when you receive a large tax refund. If you adjust to get a smaller refund you get the money throughout the year, then you can use it to do the things you want to now instead of waiting until the end of the year. If you do have a large refund this year, create a spending plan for your refund so that you can use the money effectively.
Be sure you don't spend your refund on things that will negatively impact you financially.
A Smaller Refund Can Help You Cover Your Monthly Bills
If you struggle to make ends meet each month, and you get a big refund, the extra money can make a big difference in your budget. If your refund each year is $6,000, that works out so you can receive an extra $500 a month to help cover your bills. The extra money can help you stop going into debt or it can be used towards your debt snowball. If you are really struggling to make ends each month, this will help you to make ends meet so you can turn your situation around.If you rely on your refund to cover bigger expenses like property tax or to cover larger purchases each year, you can set aside some of the money each month and save up for the larger expenses.
Take Advantage of the Earned Income Credit Throughout the Year
If you qualify for the Earned Income Credit you can have that paid to you throughout the year. It is important to be sure that you will continue to qualify for it, before you do this however, so you do not end up owing money at the end of the year. If you get a raise or a second job you may no longer qualify and you will not want to sign up to receive it through work. Contact your human resources department to sign up for the early payments. If you opt for this, it is essential that you monitor your situation carefully.
You will need to change your withholding amount if you get a raise or take on another job. It can e helpful to have an accountant help you figure out if you will continue to qualify.There are other tax credits that can increase your refund amount as well.
Find Another Way to Save
If you still want to receive a large amount around the time of your refund, you can set up a savings account with an automatic transfer for the same amount you would have paid in taxes. This will allow you to earn interest on the money and you can use it for the same things you would if you received a tax refund each year. This will let you earn interest on the money, and give you more flexibility about when you can access it. If you have the direct deposit set up on the same day that you were paid, you will not miss the money, but still be able to earn more in interest.
Determine the Amount You Should Have Withheld
You can find out how much you should claim to get a small refund or no refund by using the tax withholding calculator provided by the IRS. You will need a copy of your most recent paycheck and any other sources of income you expect to receive during the year. It is a good idea to check to make sure your withholding amount is on track throughout the year. Run the numbers around August each year to make sure you are having the correct amount withheld.