According to National Taxpayer Advocate’s “Annual Report to Congress,” the average tax refund in 2021 was $2,775. Many filers see the refund check as a fabulous spring income boost that will help with bills, vacation plans or that shiny new toy you’ve been eying. But is it really ideal to receive such a large sum back from the government? Don’t forget that the nearly $3,000 you happily take back in April is your money, which you loaned interest-free to the government. If getting a huge lump sum back is how you make financial ends meet every spring, consider these tips for making the most of your money.
Aim for a Modest Return
In order to reduce your tax return, you will need to reduce the amount of tax withheld from each paycheck. This can feel a little tricky because you do not want to end up owing money at the end of the fiscal year. The IRS provides a withholding calculator to help you determine how to fill out the W-4 form with your employer. Your goal is to maximize the amount of money you take home every month, and end up with a tax return of about $500 or less at the end of the year. That small return provides you with a safety net in case of miscalculation but does not give the government all the money that could be earning you interest.
Make That Money Work for You
If this will be the first year you do not plan on a large return, it can be easy to let the extra money in each paycheck simply slip away in thoughtless purchases. If you know you cannot muster the discipline necessary to put those little amounts of money aside each month, then it might be a good idea to let Uncle Sam hold onto your money for you. However, with the convenience of automatic transfers, even the most savings-averse filer should be able to put aside the money that would have otherwise been collected as tax.
Do some homework to find out where you will be able to earn some interest on that money. ING Direct, Ally and FNBO Direct are all online banks offering high-yield savings accounts. While the interest from these accounts will not allow you to retire early, they will earn you more money than you’ll get from Uncle Sam holding onto the same amount of money. With an automatic deduction every month to one of these banks, you won’t even notice the missing money, but you will be earning. Here are some more tips on how to use your tax refund.
Don’t Go on Autopilot
After doing the homework to determine how much less you can have withheld, it can be tempting to simply do the same thing next year. But it’s important to reassess your tax circumstances every year, so that you can always maximize your take home pay. That way, you won’t have to wait for April to feel financially fit. You’ll have that “refund” around all the time, earning you interest and giving you a financial cushion. And doesn’t that feel more empowering than a $2,775 check from D.C.?