Financial Wellness: Tax refunds are wasteful, not windfallThey say the handyman’s house is the last to be fixed. In our family’s case, the accountant’s taxes are the last to be done.
By: Sherri Richards, INFORUM
They say the handyman’s house is the last to be fixed.
In our family’s case, the accountant’s taxes are the last to be done.
Given his hectic schedule this time of year, I knew it would take my CPA husband a while to file our income taxes. I waited until early April to remind him they still needed to be done, as he’d requested.
And so about 10 p.m. one April Saturday, Craig pulled up the tax software on his laptop and set about entering our W-2s, 1099s and related paperwork while I watched “Die Hard” on the couch.
There’s no real rush on our end to file early, as we don’t expect a large refund.
In fact, I was thrilled when Craig said we owed $180.
Then, he entered in our 2013 day care costs, and the figure changed. We had about $100 coming back.
“Aw, darn,” I said, diverting my attention from John McClane.
This makes no sense to people who relish getting a refund. But refunds are not smart money management.
It means you’ve overpaid, and let Uncle Sam hold on to your money without paying you interest.
According to the IRS, the average refund for 2012 was $2,803. CNN Money reports the average tax refund paid out this year from Jan. 31 through March 28 was $2,831.
If that’s about the size of your refund, consider this: that money could have been in your paycheck all year long instead. It could have been an extra $235 in your pocket every month.
That $235 could have gone into a retirement plan, earning interest and growing. It could have built up an emergency fund, or been used to pay off credit card debt.
While many people view the refund as forced savings, financial professionals at the Village Family Service Center in Fargo point out in a recent blog post that “a once-per-year refund often results in a once-per-year splurge.”
There are better ways to save, and having that extra money throughout the year could reduce financial stress, the blog post also says.
It’s easy to capture that money. Simply request a new W4 form from your employer and adjust your withholdings, reducing the amount of money taken out of your check each payday.
The website IRS.gov has a withholding calculator to help you determine the proper number of withholding allowances.
Once adjusted, it’s important to be intentional about that newfound money. Dedicate it to a financial goal. Increase your 401(k) contribution or set up an automatic transfer into a money market account.
Take your tax refund out of Uncle Sam’s hands, and put it toward your own financial health.
Sherri Richards is a thrifty mom of two and Business editor of The Forum. She can be reached at firstname.lastname@example.org