Why You Should Consider a $0 Tax Refund

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Every year, millions of Americans look forward to their tax refunds. It always feels like a windfall since the average refund, according to the IRS, is more than $2,000.

But that money, for most people, isn’t really a windfall. It’s called a refund for a reason: That money is already yours. And you’ve been offering the government an interest-free loan.

Putting your money to work for you

When you get a tax refund, you are simply getting your own money back. It means you have overpaid on your taxes and the government has been using the excess for a year, while it hasn’t been benefiting you at all. Think about your last tax refund. You could have been using that money to your advantage all year by:

  • Paying down debt. High-interest debt is a money waster and getting rid of it can help you keep more of your money, instead of lining the pockets of your creditors.
  • Investing. Offering the government an interest-free loan means that you are getting nothing in return. What a waste of money! Instead, you could have been putting that money to work for you through investments. Even a CD or online savings account is a better use for your cash than lending it out without a yield.

Adjusting your withholdings

Chances are that, if you look at your W-4, you withhold a little extra each month for your taxes. Instead, fill out a new W-4, and only claim the necessary exemptions for your dependents. This way, you’ll end up with more in your paycheck that you can use to your advantage. Either use this money to make debt payments, or have it automatically deposited into a high-yield savings account or investment account.

If you are self-employed, you adjust your estimated taxes every year. Only pay what are you expected to according to the formula offered by the IRS. Be aware, though, that if you earned more this year than last year, you may owe additional taxes. If the discrepancy is larger than $1,000, you could be charged a penalty. But, if you have paid at least 90% of your taxes for the current year, or if you pay 100% of what was shown on last year’s return, your penalty will be waived.

Striving for a $0 tax refund is a smart move that can help you use your money more efficiently.

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