You’ve filed taxes and are getting a big tax refund. Everyone gets excited about that BIG refund. Why is this? Is this really good? Well, not really unless you are getting refundable tax credits (EIC, AOTC, Additional Child Tax Credit, etc) to get that refund.
Myth: Getting a big refund on my income taxes is a good way to save money.
Truth: If you get a large tax refund, you’re allowing the IRS to take too much money out of your paycheck. You’re loaning the government your money—interest free. That’s money you could use to pay off debt and/or build wealth each month.
Getting a chunk of your money back at tax time is not the same as taking it home in your paycheck each month. According to the IRS, the average tax refund will be $3,116 in 2014. That’s about $259 per month you can’t use because you’re sending it to the government!
A “tax refund” is made up of two parts – 1) you give your federal or state government YOUR hard earned money throughout the year and when you file your taxes, 2) the government gives you YOUR money back. Effectively you are letting the government have it interest free for the year then returns it to you. You are hiding your money under the IRS mattress except you don’t have access to it.
Your goal is to pay nothing at tax time and not get a big check back from the government. To do that, do some figuring now to determine what your taxes will be for next year. Fill out a new W-4 to have the proper amount withheld from your paycheck. You can get an idea of your potential savings by using the withholding calculator at irs.gov.
Instead of giving your $259 a month to Uncle Sam, invest in a Roth IRA.
Remember – it is your money, after all.
