www.taxprofessionals.com - TaxProfessionals.com
Posted by Daniel P Vigilante CPA and Profit Consultants

Here’s Why Big Tax Refund Is Not Always Good News

Here’s Why Big Tax Refund Is Not Always Good News

The average tax return in the United States in 2016 was $2,860. It’s kind of impossible for most people not to celebrate getting a large tax refund. It’s definitely better than paying the tax collector a huge amount of money. However, there can be drawbacks for some people.

Paying your taxes strategically is one of the smartest decisions you’ll ever make with your money. If you consult a tax professional now who is an expert in tax preparation and planning, you will be advised that planning your taxes is the best thing to do if you want to pay less for the whole year and receive a smaller tax return.

To better understand why a big tax refund is not always good news, let’s break down its pros and cons so that you can keep them in mind for next year’s taxes.

Pro: A Tax Return Means Extra Cash

Getting a tax return feels like the government is handing you free money - it truly is. We all love to check the status of tax returns waiting for the moment when our bank accounts increase. We all want the extra cash. Nearly six in 10 Americans don’t have enough savings to cover a $500 unexpected expense according to Bankrate.

Con: Your Monthly Paycheck Is Lesser

A fat tax return is usually the result of deductions and smart itemization. Another reason is that people pay more taxes every month even though it’s not that necessary. Taxpayers purposely do this by arranging to have a surplus amount taken out just in case their taxes are higher than they thought it would be. If you are unsure about your tax responsibility and you want to lower the chance of owing money in tax time, this strategy is helpful.

As for half of the American families living paycheck to paycheck, it may not be the best financial decision to pay more in taxes than necessary every month. This is applicable for those who continue to rack up credit card debt or have unsecured debt with high-interest.

You may find out how much you pay into taxes if you re-evaluate accordingly. Since you take home more of your paycheck every pay period, it feels like getting an immediate pay raise when you adjust your withholding.

Pro: You Save More When You Pay More Taxes

If you’re one of the many people who like to spend, overpaying taxes every month may be a good thing to do because it forces you to indirectly save your money. Now, waiting on a large tax return could be financially better if you’re the kind of person who benefits from having Uncle Sam hold on to your cash.

Con: Saving or Investing Tax Returns Is Not Very Common

If we have to be honest here, we like to spend a huge portion of our tax refund money once we receive it. Obviously, spending on something that’s not necessary can put us our budget into jeopardy.

Instead of spending the extra cash, we should use it to pay down debt instead or invest it for our assets to grow. According to the survey conducted by GOBankingRates, many people say using their tax return to pay off debt or bulk up their savings have always been their plan but only 32% of the respondents have a game plan. If you don’t want to waste your tax return, request for it to be deposited directly to your savings account.

Pro: A Tax Return May Seem Like a Loan without Interest

A lot of taxpayers consider their tax returns like an interest-free loan. In order to pay for a downpayment or purchase an expensive item that would otherwise require them to get a loan, they use their tax return instead. For people who don’t need the extra money for an emergency fund or bill payments, this is a financially sound decision since it helps you to save and avoid interest. If you’re not the best at saving money for a big purchase, this one is a sound strategy.

Con: The Government Is Like Receiving Interest-Free Loan

Receiving a refund means the government is like paying you back for overpaid payments. But the money sitting the federal government bank accounts is not yours up until that point. You could save the extra money yourself and earn interest on it instead of giving the government an interest-free loan.

Daniel P Vigilante CPA and Profit Consultants
Contact Member