Friday, February 7, 2014
Could Your Tax Refund Be Costing You Money?
Time Business & Money posted an interesting article earlier this week titled “This Simple Tax Error Is Costing You $2,800”. The article covers the relevant topic of tax refunds and discusses how having a large tax refund could actually be detrimental. Read below to review key points of the article, or click here to read the article in its entirety.
Did you know? Over 68% of Americans prefer to pay more taxes than they owe so they can receive a larger tax refund.
The average tax refund for 2012 was $2,803, which means an overpayment in taxes by about $54 per week per individual.
It seems many people use overpaying into their taxes as a sort of “forced-savings plan”. Over 2/3 of those who receive a tax refund choose to either save/invest it, or they use it to pay off their debts, rather than simply spending the money.
Unfortunately, nearly 50% of people who pay the correct amount in taxes throughout the year, and thus have more take-home pay, actually end up spending the extra money rather than saving or investing it.
So what is the recommendation? Pay the correct amount of taxes throughout the year and set up an automatic monthly withdrawal for the additional money. The funds can either be transferred into a savings account or it can be used to pay down debt.
In a savings account, the money will earn interest, whereas sitting in Uncle Sam's pocket until tax-time earns you nothing. Also, these funds will be accessible if needed for big expenses or an emergency situation, which will also help to avoid increasing debt (with high interest) to pay for these occurences.
Another option is to transfer the funds to pay down debts, and thus lower interest charges. This maneuver could actually add up to an average savings of almost $200 a year, which can make a huge difference over time.