Imagine the IRS offering an apology with your tax refund: Sorry, here’s your money back. In the 2022 tax season, more than 110 million taxpayers received a tax refund — and bragged about it! The average refund was $3,252. Instead of having the money sit in IRS coffers all year, that money could have been paying your bills or accruing interest in an investment account.
With the extra cash, you could:
- Set up an automatic transfer from checking to a savings or investment account.
- Pay off your credit card and student loan debts and save a significant amount of money in interest payments; even if your interest rate is not high, keeping your balance low or nonexistent is a good idea.
- Build an emergency fund, with six months’ living expenses socked away.
- Save more for retirement with contributions to a 401(k) or an IRA.
- Add to a 529 college savings plan.
- Make extra payments on your mortgage.
- Save for major purchases.
Take the next steps
Over several decades, any of these changes could earn you a more comfortable existence. So how do you get there? How do you keep your money throughout the year instead of essentially making an interest-free loan to the government? Follow these few simple steps:
- Adjust your tax withholding and you’ll feel like you gave yourself a raise. This can be complex, so be sure to discuss your withholding with a tax professional.
- Tag those extra dollars with an assignment in your budget; otherwise it will feel like the money vanished. In fact, that’s why some people want a tax refund at year’s end — they feel it’s enforced saving! But if you discipline yourself, you don’t need the IRS as your investing partner.
- Work with your tax adviser to adjust your withholding; you may need to fill out a new W-4 tax form. There are also reasons your withholding may need to change: marriage, additions to the family or income from a second job or side business that you’ve added or that has dried up. Maybe you haven’t taken into account all your dependent or property tax deductions, for example.
Do it now
This is not something you have to wait for until next tax season. Do it now! It’s a good idea to adjust your withholding well before you expect your tax return. There’s a growing opportunity cost the longer you wait for the money — you’ll miss out by not evaluating the costs and benefits of every option available.
Remember that paying too much amounts to an interest-free loan to the government above what your fair share is. Keep more money in your pocket — and put it to good use.
