Are you looking forward to a big this year?
According to a recent survey by FinanceBuzz, the ideal situation for 79 percent of American taxpayers is receiving a , rather than owing to the government or even breaking even on their .
And for the most part, it looks like they’re getting their wish: In 2019, about 72 percent of filed resulted in a , for an average amount of $2,729, according to the IRS.
After all, who doesn’t like getting a check for nearly $3,000?
But there are reasons to avoid getting a large .
"A is not free ," says Alexa Serrano, Finder's Banking and Investment editor. "It just means that you overpaid your throughout the year."
Because when you receive a Bank on Yourself and a New York Times bestselling author. "You’re giving the government an , while getting a zero rate of return on your ."
, "that’s your own you’re getting back," says Pamela Yellen, founder of
So what's a smart to do?
Key Takeaway: Understand your tax responsibilities.
- Keep more of your money throughout the tax year so you have more money to invest.
- Use last year's tax return as a road map for this year's taxes.
- If you receive a large refund, try increasing your allowances on your W-4.
- Minimize your tax liability as much as possible.
Determine your tax strategy
The best option is to break even — don't receive a or owe to the IRS.
Although it's nice to get a big chunk of change in the form of an , you can put that to better use if it's available to you throughout the year.
For example, instead of receiving a large all at once, you could set aside that throughout the year and invest it, it in a high-yield savings account, or put it in your retirement account. That way, instead of loaning to the government interest-free, your cash earns interest for you.
On the other hand, although many experts advise against getting a large , that's not one-size-fits-all advice.
“Deciding whether you want to owe or receive a comes down to your personal goals and financial lifestyle," Serrano explains.
In an ideal world, we'd all regularly into savings or investment accounts, so it could yield interest over time. But the reality is that many of us struggle to save if it's just sitting in our accounts, available to use at any time. If that sounds like you, it may be a better strategy to pay more to the IRS throughout the year.
"If you don’t have it, you won’t spend it," notes Peter J. Greco, a CPA and founder of the CSI Group, LLP. "It is basically a forced savings account."
But “if you consider yourself financially responsible, you might want to opt out of receiving a at the end of the year," Serrano advises.
And if you can't break even, the next best option is to owe a small amount, according to many experts. Just remember that the key is "small." "If you owe too much, you might just have a penalty for failure to pay estimated RMS Accounting. ," warns Steven J. Weil, an enrolled agent and president of
Josh Zimmelman, owner of Westwood Tax & Consulting, suggests putting extra throughout the year toward your emergency savings fund.
"Worst case scenario, if you still end up owing next year, you’ll have that extra saved to help pay it," Zimmelman points out.
Estimate what you might owe next
Taking a look at last year's is a good way to gauge what you might owe next year — or at least how much you should pay to avoid owing penalties to the IRS.
Ben Watson, a CPA and personal finance expert from DollarSprout.com, offers a few suggestions:
1) Pay 100 percent of your from last year, or 110 percent if you're adjusted gross is $150,000 or more and you're submitting your as Married Jointly.
2) Pay 90 percent of your for the current year.
Re-examine your withholdings
When was the last time you looked at Form W-4?
is what ultimately determines the size of your refund.
“If you withhold too much, you might get a big refund, but you’ll likely be short on cash all year," Zimmelman warns. "If you withhold too little, you might find yourself owing in again next April.”
According to FinanceBuzz's survey, 89 percent of taxpayers are confident their withholdings are set correctly. But if you're receiving a large refund, that generally means you're not claiming enough withholdings.
If you don't know where to start, try the IRS's online Tax Estimator. And then make sure to revisit Form W-4 at least annually.
"If you typically receive a large refund, you’ll want to increase your allowances," Serrano says. "If you owe the IRS, you’ll want to decrease your allowances. You can submit a revised W-4 form to your employer at any time."
Just make sure to proceed carefully — owing a large amount of isn't an antidote to the large-refund problem.
Re-evaluate throughout the year
Depending on what's going on in your life, once a year may not be frequent enough to check your withholdings. If you experience a significant tax event, such as getting married or having a baby, you probably need to take another look at the W-4 form.
You should probably also pay attention to changes in tax law that might affect you.
The goal in avoiding a large isn't to pay more in ; it's to keep as much of your for as long as possible.
One part of that is to claim every and all the you can on your .
"A lot of people don’t itemize their has been increased, but there are still ways to lower your even if you don’t itemize," Zimmelman says. "There are a number of tax credits and exemptions." anymore because the
If you are expecting a refund, make sure you get it as quickly as possible by using . There are multiple benefits of getting your refund through :
- You'll receive your refund faster than if you'd opted to receive a paper check.
- If you're using your refund as a "forced savings," you can have it deposited directly into a savings account.
- It saves costs only 10 cents. — according to the IRS, every paper check issued costs taxpayers $1, while every
You can receive your refund via as your refund method via your tax software, , or Form 8888. Be ready to provide your number and routing number.
whether you're electronically or with a paper ; just select
Talk to a tax expert for personalized advice
It's hard to actually break even on your ; it's more likely you'll be able to ensure a small refund or a small amount of owed.
"Working with a financial professional, like a CPA, can help ensure that you are paying enough Husson University's School of Accounting. to avoid a penalty without providing the government with an ," says Dewey Martin, professor emeritus from
“Don’t wait until next April to start your research," Zimmelman advises. "If you find it too confusing, hire a professional to help.”