A lot of people say that it is better to receive a tax refund check than to write a check over to Uncle Sam. However, it can be a deceptive situation where people could overlook the underlying problem. As you look forward to receiving a refund from the IRS, you might already be thinking how you can spend that amount you have yet to get.
The problem is that you might not realize that it is your money, to begin with. It is an amount that you could have used early on. This is true if you have been getting big amounts for the past few years. According to Business Insider, consumers received an average of $2,895 refund last year. That is quite a sum and could have paid down a number of your credit card debt.
Some people are looking forward to receiving their yearly tax refund so they can use it for some of the “wants” in their list. Technically, it is an unbudgeted amount and can be used for things not in your budget. How to best use it is a different matter and a different topic for another day. What you need to understand is that your tax refund check could have been used earlier to your advantage.
As you get excited about receiving this amount, remember that you could have used this before you even filed or paid your taxes. There are a few uses for the refund amount if you had that early on. Here are some of them.
Making above minimum payment on your card
If you had the amount on your tax refund check last year, you could have used that fund to make bigger payments on your credit card. At this point, you should know that minimum payment is quite deceptive in a way that it bill you more in interest and other fees. It is very tempting to just pay a small amount each month but you will be making a bigger payment over time.
This is because as you make the minimum payment, your lender would now start adding multiple fees and interest payments on your account. You might not notice it but a big part of your minimum payment simply goes to these fees. As a result, you are only paying down a small portion of the principal amount every month. This drags your payment over a long period of time making you pay interest much longer.
Putting extra money into your emergency fund
There is no question that your emergency fund is one of the most important accounts you would ever need. Especially as a lot of people are still reeling from the effects of the 2008 recession. A lot of people not only lost their homes but their jobs as well. Having an emergency fund can help you during these times as you look for an alternative source of income.
It is ideal that if you receive a tax refund check, you put most if not, all of it into your reserve fund. So you might be asking what the problem is with this scenario. What you need to remember is that if you had that amount early on and you needed it for some reason, it would have served its purpose. Also, the fund could have earned a little from interest if you had it earlier on.
Saving it up for your retirement fund
From the same argument, having the amount you get a refund in your tax payment could be used better with interest-bearing accounts. One perfect example is your retirement fund. You will heavily rely on this account when the time comes that you have to stop working. The idea is to save as much as you can as early as possible to make the interest work in your favor.
Compound interest works best when you are able to start early with your retirement savings. This is because interest also earns on interest over time. If you had that tax refund amount early on, it could already be earning interest for you. You could say that it was lost opportunity for you and trying to recoup that would mean computing for interest earned.
Investing in yourself and earning more in the process
Your tax refund check could have been used to help you improve and invest in yourself. This is probably one of the best uses for that fund if you had it early on. If you are really into photography and you want to expand your skill set, you could have used that amount to take up classes. It is also possible to purchase new gear with it.
Are you looking to start investing in the stock market to have passive income, you could have used that amount you received in your tax refund to get started early on. You could already be earning on the side with that investment. Also, you could have used that amount in furthering your skill to make you more valuable in the workplace.
Now that you have an idea about some of the particular uses of your refund check, here are a few of the things you can look into to help you adjust your taxes.
Revisit your tax application
This is one of most important step you need to make if you wish to make adjustments to your tax payment. You need to know what your withholding is so you do not overpay the next time you file your taxes. Look at your W4 and try to find out if you need to make adjustments based on changes in your present situation. From marital status to dependents which will all affect your personal allowances.
Talk to your HR
One of the things you can do to manage the amount you receive in your tax refund check is to talk to your admin or HR. They can help you look at tax documents and help you make the adjustments you need. The idea is not to underpay because that brings a different set of problems on its own. Your goal is to adjust it in a way that you get to use that money upfront rather than loaning it to the government tax-free.
Reach out to a lawyer
You can also reach out to a lawyer who specializes in tax filings to help you understand your options better. They can discuss with you how tax payment works, how you should file them and what your options are for allowances based on your current situation. These details would change at every point in your life from getting married to even having kids.
Your tax refund check is a welcome surprise when you get it in the mail especially when you least expect it. It can even be a life-saver when you have an emergency you’re dealing with at the time you get it. It is like that much-needed shot in the arm. However, you need to understand that it would be a lot more useful if you did not overpay in the first place. That amount could have helped you increase your earning capability, strengthened your emergency fund, or even made your retirement nest egg a little bigger.