Tax season is in full swing, and millions of Americans are waiting with bated breath for their refund checks.
Many people refer to the day they get their refund as “the biggest payday of the year.”
The amount Americans receive in rebates has been increasing every year, according to data from the Internal Revenue Service (IRS). For the 2022 season, the typical taxpayer set back $3,012.
A refund is money you overpaid to the IRS through payroll withholding, and the IRS keeps it until you file your tax return.
Experts warn that while a refund may seem like a windfall, paying too much tax means missing out on that money in the year.
They say you can spend it on family and friends during the holidays, or invest it so it grows in value. At the same time, if you pay too much in taxes upfront, the IRS will offer you an “interest-free loan.”
The amount Americans receive in kickbacks is increasing every year, according to Internal Revenue Service (IRS) data.
Every time you get paid, your employer withholds a portion of your income for taxes such as Social Security and Medicare, and the amount varies depending on your income.
“Experts say we need to change the way we think about tax refunds and remember that they’re our money, after all,” said Rebecca Chen, a reporter and certified public accountant. Yahoo!finance.
“And when you withhold too much to the government, it’s basically like giving them an interest-free loan for the whole year.”
She added that this is a pretty big deal because we live in an environment with very high interest rates and a lot of debt.
At its latest meeting last month, the Federal Reserve kept interest rates unchanged at 5.25% to 5.5%, the highest level in 22 years since last July.
This has a ripple effect on mortgages and credit card loans.The average interest rate on credit cards has increased by more than 24%, according to lending tree.
If you’re someone with a growing credit card balance and a lot of debt, Chen says it doesn’t necessarily make sense to pay such high interest and get a government garnishment.
“You’ll be better off financially if you reduce your tax withholding and use that money to pay off high-interest credit card debt,” she says.
The less you withhold in taxes, the more money you’ll receive each month and the more money you can invest or put into a high-yield savings account.
If your average $3,000 withdrawal were made into a high-yield account with 5% interest, you’d earn $150 over the course of the year.
Reporter and CPA Rebecca Chen told Yahoo!Treasury says experts warn Americans need to change attitude towards tax refunds
But others argue that people are looking forward to receiving large refunds and then spending them wisely.
According to the National Retail Federation investigationOf those who expected a refund last year, half said they planned to save it, one-third said they would pay down their debt, and 28% said they would use it for daily living expenses.
Mark Steber, chief tax information officer at tax preparation firm Jackson Hewitt, said that if Americans received that money as a paycheck each month, they might immediately use it instead. USA Today.
“The money these people get on their biggest payday at a time is life-changing,” he said.
He pointed out that many major banks’ savings rates hover around 0.5%, so you only get an extra $15 on your average $3,000 refund.
Some experts say that while a refund may seem like a windfall, paying too much in taxes means you’re missing out on money that could have been put toward savings or investments that year. I’m warning you what it means.
However, if you withhold too much and pay too little throughout the year, you will be subject to an underpayment penalty.
Generally, Americans must pay at least 100 percent of last year’s taxes or 90 percent of this year’s taxes to avoid penalties.
To roughly calculate how much you owe and how much you will get back, IRS Withholding Tax Estimation Tool.
You will need your pay stubs and, if applicable, your spouse’s recent tax return, as well as information including your filing status, income, and any deductions you expect to receive.
Chen warns that many people don’t realize that they can change their tax withholding throughout the year.
You can complete the W-4 form and submit it to your workplace’s human resources department. This can be done as many times as you like throughout the year to accommodate changing life circumstances.
“It should be reflected in your next paycheck,” she said. “So you know it’s a quick and easy process for taxpayers.”
