My husband and I get a tax refund every year and until recently we thought that was a good thing. You probably think it’s a good thing too. It feels good to get a check in the mail or see that sum suddenly appear in your bank account.
Most people tend to celebrate and have fun thinking about what they will do with their nice chunk of change. But a tax refund is actually a bad thing. Why? Because it means you paid too much to the government throughout the year and now they are paying you back interest free. That’s YOUR money they’ve been holding onto, using, making interest off of. You could have been taking home extra money each month and using it to pay down debt, build up your savings, buy more chocolate, whatever you consider a priority in your life. Instead you gave it to them to hold onto until tax time.
Think about how much more that refund would be worth right now if you’d been investing it throughout the year. Or think about how much less interest your debt would have accrued throughout the year if you had been able to pay more of it off each month. Are you starting to see why a tax refund is not something to be celebrated? Good! Now let’s talk about what you can do about it.
How can you avoid a tax refund in the future? One way is to ask your employer to give you a new W-4 tax form to fill out. A W-4 tells your employer how much federal income tax to withhold from your paycheck. The more allowances you claim, the less taxes will be withheld. If you claim more allowances than the last time you filled out the form then less tax will be withheld. This means your take home pay will increase and your potential for a tax refund will decrease. You can claim as many dependents or allowances as you want on your W-4 regardless of whether or not you actually have any dependents. There is no law that prohibits you from doing this.
Calculate the amount you are overpaying
Here is your next step. Take the total refund you received this year and divide by however many pay periods you have in one year. If you are paid every other Friday, you will divide by 26. If you’re only paid once a month you will divide by 12. Once you’ve figured out your answer, that will be the amount per paycheck that you’ve been overpaying. You can then go to your employer and ask them to help you figure out how many allowances you need to claim in order to stop having that amount withheld from your paycheck. They will contact their payroll company to find out for you and will most likely not be able to get it exact, but as long as it’s within a few dollars it will do. The goal is to get it as close as possible.
A tax refund means you paid too much to the government throughout the year and now they are paying you back interest free. That’s YOUR money they’ve been holding onto, using, making interest off of. You could have been taking home extra money… Click To Tweet
Here’s an example with real numbers. Let’s say last year I got a tax refund of $3,900. I get paid every other week, so I’m going to divide $3,900 by 26 to get $150. $150 less in taxes need to be withheld from each paycheck in order to avoid getting a refund. I currently have $275 withheld from each paycheck and I now need to reduce it by $150. This comes out to $125. At this point I would go to my employer and ask them how many allowances I would need to claim on my W-4 in order to bring my withholdings down to $125 per paycheck. They will contact their payroll company to find out and I’ll make the necessary adjustments on my new W-4 form. I have now added over $300 per month to my take home pay and reduced my refund to almost nothing.
It’s not an exact science
Like I said, you will most likely not be able to get it exact. You might still end up with a very small refund at the end of the year, or you might end up owing a small amount. I personally would rather owe a small amount than be owed a large amount that I could have had in my possession all along.
Now that you know that tax refunds are bad and how to avoid them in the future, what will you do with your extra take home pay?
Disclaimer: This information is based on standard salaries and might not necessarily apply to commissions, bonuses, or any other type of pay structure. Please consult with your tax professional for more information.
If you didn't account for each job across your W-4s, you may not have withheld enough, so your tax refund could be less than expected in 2024. Or, if you had a salary increase in 2023 but didn't update your tax withholding accordingly, you could receive a smaller refund.
Errors on or Incomplete Tax Returns: Your refund may be delayed for something as simple as a forgotten signature or because there is some other type of error, including mathematical errors or if the income reported by you doesn't match what your employer or other third-party payers have reported.
Is getting a big tax refund a good thing? No, some financial experts and taxpayers say, because it means you're giving up too much of your paycheck to taxes during the year. If less is taken out for taxes, you'll get a smaller refund but more money in each paycheck for expenses or saving and investing, they argue.
If a taxpayer refund isn't what is expected, it may be due to changes made by the IRS. These changes could include corrections to the Child Tax Credit or EITC amounts or an offset from all or part of the refund amount to pay past-due tax or debts.
The IRS expects most EITC and ACTC related refunds to be available in taxpayer bank accounts or on debit cards by Feb.27, 2024, if the taxpayer chose direct deposit and there are no other issues with the tax return.
How do I get a 10,000 tax refund? You could end up with a $10,000 tax refund if you've paid significantly more tax payments than you owe at the end of the year.
If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date IRS receives your return. If you file your return electronically, your refund should be issued in less than three weeks, even faster when you choose direct deposit.
If your refund details state that it's still processing, you can check your tax return to see if you catch any errors. If your refund status instructs you to contact the IRS, you can speak to an agent to get clarification by calling 1-800-829-1040.
If the IRS decides that your return merits a second glance, you'll be issued a CP05 Notice. This notice lets you know that your return is being reviewed to verify any or all of the following: Your income. Your tax withholding.
There are lots of reasons why this might happen. In most cases, the IRS takes part of your refund to pay for outstanding government debts you might owe. These include: Overdue federal tax debts.
If you make $40,000 a year living in the region of California, USA, you will be taxed $7,507. That means that your net pay will be $32,493 per year, or $2,708 per month.
How Do I Know If It's Too Large? The average tax refund for the 2021 filing year was $3,039. If your refund is close to or exceeds that amount, it's probably too large. In this case, taking steps toward lowering your refund amount in future years is usually advisable.
If the IRS is reviewing your return, it may have questions about your wages and withholding, or credits or expenses shown on your tax return. The review process could take anywhere from 45 to 180 days, depending on the number and types of issues the IRS is reviewing.
The IRS typically processes tax refunds and executes direct deposit transactions within 21 days after accepting your tax return. It's common for the IRS to issue refunds on business days, from Monday through Friday.
If the IRS is delaying your refund, you'll need to understand why, and navigate the IRS to issue your refund as quickly as possible. This can be a daunting task because refund holds can feel like audits. But, be patient, and don't worry.
For tax year 2024, the standard deduction for married couples filing jointly rises to $29,200, an increase of $1,500 from 2023. For single taxpayers, the standard deduction rose to $14,600, a $750 increase from the previous year.
The earned income tax credit is a refundable credit for low- to middle-income workers. For the 2024 tax year, the tax credit ranges from a max of $632 to $7,830, depending on tax filing status, income and number of children. Taxpayers without children can qualify for a lower credit amount.
Introduction: My name is Merrill Bechtelar CPA, I am a clean, agreeable, glorious, magnificent, witty, enchanting, comfortable person who loves writing and wants to share my knowledge and understanding with you.
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