With it being tax season, I thought it fair to share a post relating to this. Most Americans hope for a refund, wanting to get in on this “free money” but do you fully understand how a refund works? A tax refund is money that you overpay during the year that is returned to you once you file your tax return and the Internal Revenue Service (IRS) accepts it. So, is there a strategy to better your chances of getting a refund each year?
Well the answer is, yes! If you work for an employer, you will be asked to complete a Form W-4 (Employee’s Withholding Allowance Certificate). When you complete the Form, it will determine the correct number of allowances you can claim. Please note that some people choose to claim more than the amount determined, while others may choose to claim less than the amount determined.
The higher the number of your allowances, the less you pay in taxes, and the more you take home per paycheck throughout the year. The catch is, during tax time when you prepare your taxes, there will be a greater chance that you will owe the Government, as you paid too little tax throughout the year. The lower the number of your allowances, like claiming 0 or 1 on your W-4 Form, the more you pay in taxes throughout the year, and the less you take home per paycheck. When you file, you have a greater chance of receiving a tax refund, as you paid more taxes than you should have.
If you claim the right amount of allowances based on your personal situation, the amount of taxes you pay throughout the year, should be close enough to the amount you are required to pay. Hence, you could find yourself getting a small refund, or owing a small amount, or maybe not owing or getting a refund at all.
Sounds simple, doesn’t it? Just lower your allowances, pay more taxes throughout the year and get a refund. Well there are somethings to consider when making your decision. When you get your refund, you get your money back without interest. You have essentially lent your money to the Government throughout the year, and it is returned to you with nothing extra. If you try to pay the right amount of taxes throughout the year, each paycheck, you have that money available to you to save in a high interest savings account, or to invest it, hence making extra money.
So, is it wrong to overpay taxes, and lose out on the opportunity to have saved or invested that money? Well to be honest, getting a refund is a strategy that works for some people. This may be the only way they are able to have some money returned to them that they did not have access to. Chances are, if they were receiving this money all along, they would have spent it. You have to decide what works best for you personally.
I must also share that there are additional ways to better your chances for a refund such as getting certain refundable credits such as Earned Income Tax Credit, Child Tax Credit, and American Opportunity Credit and Lifetime Learning Credit, just to name a few. Refundable tax credits are money the government gives to you because you have met certain criteria. This is not money you have overpaid, this is just extra money that the government gives to you because you are determined to be eligible for that specific credit.
I hope you have a better understanding of tax refunds if you didn’t before! Please like and share this post if you found the information valuable. If you have any questions, comments, or willing to share your plans if you receive a refund, please leave them in the section below.