‘Biggest payday of the year!’ Are we CHEATING ourselves by overpaying tax just for a big ‘windfall’ refund at the end of the season? Experts weigh in…
Tax season is in full swing and millions of Americans are waiting with bated breath for their refund check.
Many people call the day their payback occurs the “biggest payday of the year.”
According to data from the Internal Revenue Service (IRS), the amount of rebates Americans have received has increased year over year. For the 2022 season, the average taxpayer got a refund of $3,012.
A refund is money you overpaid to the IRS through payroll deductions, which the agency has held until you file your tax return.
Experts warn that while a refund may seem like a windfall, paying too much in taxes means missing out on money throughout the year.
They say it can be spent on family and friends during the holidays – or invested so it grows in value. At the same time, too much tax in advance gives the IRS an “interest-free loan.”
The amount of money Americans have received in rebates has increased year over year, according to data from the Internal Revenue Service (IRS).
With each paycheck, your employer withholds a portion of your income for taxes such as Social Security and Medicare, and the amount depends on how much you earn.
“Experts say we need to change our mindset about tax refunds and remind ourselves that it’s our money to begin with,” Rebecca Chen, reporter and CPA, told me. Yahoo! Finances.
“And if you have too many government deductions, it’s basically the same as giving out an interest-free loan all year round.”
This is quite a big deal, she added, because we live in a very high interest rate, high debt environment.
At its last meeting last month, the Federal Reserve kept interest rates at a 22-year high, between 5.25 and 5.5 percent, where they have been since July last year.
This has a knock-on effect on mortgages and credit card loans. According to the report, the average credit card interest rate has risen above 24 percent Credit boom.
If you’re one of the people who sees your credit card balance increasing and high debt, Chen says, it doesn’t necessarily make sense to withhold from the government while paying such high interest.
“Reduce your deductions and use that money to pay off your high-interest credit card debt so you’ll be better off financially,” she said.
Less deducted for taxes means you have more in your paycheck each month, which you can invest or put in a high-yield savings account.
If an average refund of $3,000 were placed into a high-yield account with 5 percent interest, it would generate $150 for the entire year.
Rebecca Chen, reporter and CPA, told Yahoo! Finance experts warn that Americans need to change their attitude toward tax refunds
But others argue that people look forward to getting a large chunk of the money back, which they then spend wisely.
This is reported by a National Retail Federation questionnaireHalf of people who expected a refund last year planned to save it, a third said they would pay off their debts, and 28 percent said they would use it for everyday expenses.
If Americans received that money in their paychecks every month, they might be able to spend it right away, says Mark Steber, head of tax information at tax advisor Jackson Hewitt. USA today.
“The money these people get on their biggest payday is life-changing,” he said.
He noted that with savings rates hovering around 0.5 percent at many of the major banks, this would only add an additional $15 to the average $3,000 repayment.
Some experts warn that while a refund may seem like a windfall, paying too much in taxes means missing out on money you could have used to save or invest during the year.
However, if you withhold too much and pay too little during the year, you will be fined for paying too little.
In general, Americans must pay at least 100 percent of last year’s tax or 90 percent of this year’s tax to avoid a penalty.
To calculate approximately how much you may owe or be reimbursed, you can use the IRS Tax Withholding Estimator.
You’ll need your pay stubs (and, if applicable, your spouse’s), a recent tax return, and information including your filing status, income, and any deductions you plan to make.
Chen warns that many people don’t realize that you can change your withholding at any time of the year.
You can complete a W-4 form and submit it to the HR department at your work. You can do this as often as you like throughout the year to adapt to changes in your living situation.
“It should be on your next paycheck,” she said. “So it’s a quick and easy process for taxpayers to know.”