Most people who expect income tax refunds have filed their returns by now. In fact, most have already received those refunds and blown the money.
But is that the best strategy?
An income tax refund can be a windfall. An opportunity to build an emergency fund, or pay off a large debt. If you haven't contributed to a retirement account yet this year, why not use that money to start? Or maybe there's a major purchase or repair you've been putting off.
If your finances are in good shape, use that windfall to treat yourself to a nice vacation or buy a new toy you have been drooling over. Or share some of the money with your favorite charity.
When you know you're getting a refund, file your return as soon as you have all the necessary supporting documents. Get your money back as quickly as possible. Because after all, it has always been your money.
The government has been using your money, interest free, all year.
If you received a big refund this year, ask yourself why? Maybe your financial situation changed a lot last year, so it was hard to predict how much income tax you would owe. But if you get a big refund every year, on purpose, maybe it's time to adjust your withholding, or your estimated tax payments, so you have access to your hard-earned money sooner. All year, so you can put it to work for you.
No one enjoys writing a check to the IRS. And you certainly don't want to owe enough to trigger a penalty. But technically, owing the IRS at tax time is the best strategy, because you are the one who has been able to use their money all year, interest free.
Some people argue that withholding enough to get a big refund every spring is like a forced savings plan. Or they are afraid they might not have enough extra cash in the bank to write that check to Uncle Sam at tax time. But why not start planning now? Put a little aside each month, in a hands-off, interest-bearing savings account or other low-risk investment. Then use those funds to cover your tax liability once April 1 rolls around next year. Anything left in the account is yours to keep, or to start growing for the next year.
Are you getting a tax refund this year? I would love to hear your comments.