How to Stop Overpaying Taxes and Start Keeping More of Your Money
By Jeremy Reif, CRPS
Getting a tax refund may not necessarily be a bad thing but it’s not necessarily a good thing either. Here are some reasons why.
Opportunity costs
When you receive a tax refund it means that you overpaid your taxes throughout the year. Essentially giving the government an interest-free tax loan. This money could have been earning interest or been invested in other ways to potentially grow your wealth. Instead, you’re giving it to the government in advance and then receive your own money back when you file your taxes.
Inflation
The value of money tends to decrease over time due to inflation. When you receive a tax refund it means that you’re receiving money that you overpaid to the government. In the past, this means that your money may not have the same purchasing power as it did when you originally earned it.
Poor tax planning
Getting a tax refund may indicate that your tax planning ideally wasn’t all that good. You should aim to have your tax liabilities match your tax withholdings. This way you neither owe taxes nor receive a refund at the end of the year. If you consistently receive a tax refund it means that you’re not estimating your tax liability properly. You may be missing out on opportunities to maximize your income and minimize your taxes.
Positive
However, it’s worth noting that some individuals receiving a tax refund may be a good thing. For example, if you struggle with budgeting or have difficulty saving money. Receiving a lump sum at the end of the year may be a helpful way to jump-start your savings or pay off debt. Additionally, receiving a tax refund can provide a sense of financial security or relief knowing that you don’t owe any more taxes. If this is the case, you should try to change this habit to break out of this trend for future years.
Another way to think of getting a tax refund is by a personal loan, if you are receiving a lump sum back it’s like saying you’re going to loan your friend or family member a thousand dollars. With the intent that you’ll get it back at the end of the year, but you won’t get any interest. It might certainly help out that family member or friend, but most would agree that if given the choice you would like to earn interest on the money you loan out.