Many Americans experienced a smaller-than-expected federal refund this tax season. If you are among them, there are a few things you should know about the 2020 tax season.
Stop delaying earnings
A lot of people count on their tax refund to pay bills, pay down bills, or provide them with a yearly cash windfall. According to the IRS, about 80% of taxpayers get a refund each year.
Getting a refund means you don’t owe federal taxes, which is good. However, it also means you provided an interest-free loan to the government. It’s crucial to remember that a refund isn’t a cash bonus. It’s money that the taxpayer earned by working, and it belongs in their regular paycheck.
Most people can’t afford to delay their earnings. There’s a better way to enjoy savings that accumulate throughout the year than letting the government hold on to the money until it’s time for a tax refund.
Alternatives to a tax refund
Going forward, those who expect a refund can increase the number of allowances on their W-4 form. If you decide to do this, the take-home amount of each paycheck goes up slightly because your employer will hold back less money for taxes.
Put the money that would normally go to the government as an overpayment of taxes into a savings account, instead. Find out if your employer offers the option to automatically deposit a portion of each paycheck into a savings account. If not, your bank may be able to help you set up an automatic transfer of a set amount each payday. It’s important to make the transfer automatic so the money doesn’t disappear into general spending throughout the year.
If you don’t have credit card debt and you rely on your tax refund to pay for a vacation or something fun, deposit the money in a savings account and let it build throughout the year so you can use it when it’s convenient.
How much extra take-home pay can you expect if you eliminate your tax refund
The average tax refund last year was about $2,700. Spread out throughout the year that equals an increase in weekly take-home pay of about $52 per week. If you get paid every other week, you can expect to see each paycheck go up by $103.
That may not seem like a lot of money. Many Americans didn’t notice small increases in their paychecks during 2018 after the Tax Cuts and Jobs Act went into effect. As a result, they were surprised when their annual tax refund was smaller than expected.
Getting a smaller tax refund means you took home more money throughout the year. Owing money to the IRS means you didn’t pay enough taxes throughout the year. Ideally, you wouldn’t owe taxes or be owed a refund. In this scenario, you would have paid the correct amount of taxes and with a bit of planning, would be able to set aside some money from each paycheck for the future. Tax Steps You Should Take Now-Adjust W-4 Withholdings