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Expecting a big tax refund? Here’s why you are making an expensive mistake.

Posted On: December 14, 2018  0 Comments

More than 75% of taxpayers receive refunds each year. It may feel like a free bonus when that fat refund hits your checking account in the spring, but it was always your money. Here’s why you should stop giving the government that interest-free loan every year.

You could really use that money now.

Millions of Americans live paycheck to paycheck, even those with good incomes. 40% of adults couldn’t cover a $400 emergency expense without taking on debt. Even fewer could cover a $1000+ sudden expense, like the hot water heater failing or a major car repair bill. If you kept a little more of that cash in your paychecks every month and stuck it in a savings account it will be there when you really need it, rather than paying extra credit card interest until tax season.

You could be tempted to splurge.

That large influx of cash is just too enticing for a lot of people. When it feels like a free windfall of money it’s easier to justify vacations, home improvements, and shopping sprees to yourself. With smaller amounts budgeted over the course of the year, it can be easier for some people to make choices that secure their financial future.

You’re paying extra interest.

Lots of people use their tax refunds to pay down debts. You’re paying interest on those debts all year while waiting for your tax refund to come. If you take back those extra dollars you’ve been withholding, they could be chipping away at the principal every month, potentially saving you hundreds or thousands of dollars in accumulated interest.

It could be earning you money.

If you don’t have debt and already have a healthy emergency fund, that extra money could be put to work for you. Whether invested or tucked away for retirement, you can watch that money grow.

Inflation makes your money worth less.

The average inflation rate for 2018 is estimated at around 2.5%. The extra withholding from your first paycheck in January isn’t returned to you until at least February of the following year. If you withhold an extra $200 in January, the money returned to you a year later will have roughly $5 less purchasing power. Let that go on all year and you’re losing significant value you could be putting to work today.
 
At the end of the year your total tax liability is the same, whether you get a big refund or a small one. If you’ve always been in the big refund club, talk with a Bacon & Gendreau tax professional about a tax planning and withholding review appointment. It’s your money; let us help you hang on to more of it.

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