There has been a lot of talk about tax refunds recently, specifically smaller checks from the government. Many taxpayers who had grown used to huge tax refunds are seeing smaller ones this year, and in some cases, none at all. In fact, the impact of tax reform and lower withholding means some taxpayers have gone from getting money from the government to owing additional taxes. If you are facing a smaller tax refund this year, you are probably feeling pretty ripped off, but chances are you are looking at it the wrong way.
Bigger Paychecks – Smaller Refunds
Unless there are some extenuating circumstances, that smaller tax refund is probably happening because your paychecks have grown in size. Even if you did not notice it, chances are you received more money in your paycheck, due to a reduction in tax withholding.
Since less money was coming out of your paycheck, you may face a smaller refund, or even a bill from the IRS. But before you hit the streets or call your senator, you might want to take a deep breath.
Why a Big Tax Refund is a Bad Deal
You may think that big tax refund is a gift from the government, but it is simply a return of your own money. When you get a big tax refund, it simply means that you had been lending money, interest free, to the government all year long.
If that sounds like a bad deal, it is. Even in an age of low interest rates, loaning money interest free is a terrible deal, and one you should try to avoid. So now that you know that a big tax refund is a bad idea, what can you do to preserve your fiscal sanity
Create Your Own Refund
It is easy to get used to those big tax refunds, especially if you have been receiving them for many years. Maybe you use those annual checks to pay off holiday debt. Perhaps you dedicate the funds to a home improvement project or take your family on vacation. So when that tax refund does not come through, it puts a real crimp in your lifestyle.
You may need to make some r this year, especially if the smaller refund was a total surprise. But there is a simple thing you can do to fix things going forward, so you can enjoy your money now – and later.
That strategy is creating your own tax refund, and it is an easy thing to do. Just grab your paycheck stub from the same time last year and compare it to what you are getting now. If you cannot find your pay stub, ask your employer for a copy or look it up online. Many employers now keep pay records for their workers, so accessing the information should not be difficult.
If tax reform has been good to you, your current paycheck is probably higher than the one from a year ago. So why not enjoy the best of both worlds and create your own refund – one you pay to yourself? Just direct the extra money to a savings account, let it accumulate and give yourself a treat later on.
The great thing about this strategy is that the money stays with you, and you can do with it what you want. No more lending money to the government, interest free, all year long. The money you pay yourself continues to grow, earning interest along the way, so you can maximize your savings and enjoy your money now – and later.