Summary Points:
- The average tax refund from last year was approximately $3,200, which has been increasing year-over-year.
- Experts argue that receiving large tax refunds may not be beneficial for Americans.
- Withholding too much money throughout the year gives the government an interest-free loan.
- Individuals can lower their withholding and use the extra money to pay off high-interest credit card debts.
- Changing withholding is a simple process that can be done by requesting a W withholding form from HR.
- Ultimately, taxpayers should consider the best use of their money, whether it’s in a high savings yield account or paying off debt.
The latest data from the IRS reveals that the average tax refund for the previous year amounted to around $3,200. This figure has consistently been increasing year after year. While many individuals view a large tax refund as a welcome reward for completing their taxes, experts are urging Americans to reconsider their mentality surrounding tax refunds.
Rebecca Chen, a financial expert from Yahoo Finance, highlights that taxpayers should remember that the refund they receive is actually their own money. By withholding too much money from their paychecks throughout the year, individuals effectively provide the government with an interest-free loan. This is particularly significant in today’s high-interest, high-debt environment.
Consider the scenario where an average household carries a credit card balance of $7,000 and pays an annual percentage rate (APR) of 21% on that balance. In such circumstances, it doesn’t make financial sense to over-withhold money and receive a large tax refund. Instead, individuals can adjust their withholding and utilize the extra money to pay off their high-interest credit card debts. By doing so, they can improve their financial situation and avoid paying unnecessary interest.
Looking ahead, taxpayers should examine their withholding strategy for the next year to ensure they don’t end up with an excessively high refund. The first step is to evaluate whether they consistently receive large tax refunds year after year. If so, it’s crucial to recognize that over-withholding may not be advantageous. The second step involves reconsidering the amount being withheld.
Many people are unaware that they can adjust their withholding throughout the year. It’s a straightforward process that only requires reaching out to their HR department and requesting a W withholding form. By changing the number on the form, the new withholding amount will be reflected in the next paycheck. This provides taxpayers with the opportunity to have more money available throughout the year rather than waiting for a lump sum refund.
Ultimately, it’s essential to remember that the money being refunded is rightfully yours. Therefore, it’s vital to allocate it wisely to maximize its benefits. Consider depositing it into a high-yield savings account where it can earn interest or use it to pay off outstanding debts. However, one thing is clear – keeping it with the IRS is not the best option.
In conclusion, while receiving a large tax refund may seem appealing, it’s crucial to understand the potential downsides. By adjusting withholding amounts, individuals can make better use of their money throughout the year, whether it’s reducing debt or increasing savings. Taking control of one’s finances is an important step towards achieving financial stability and independence.
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