From the Desk of Mr. Broke on Purpose
This is the time of year when I see a ton of social media post and memes about income tax returns. Melody even posted a meme about waiting on W2’s earlier in the year, and while most are funny, they still highlight a vicious circle of poverty that some people are trapped in by thinking that tax refunds are a gift. With tax day being right around the corner I thought it appropriate to share my thoughts on Tax Refunds and how they’re holding us back.
When I was younger, I never understood the concept of income tax returns, and most youths don’t. How often did you hear a family member say “When I get my income taxes back….” For me, like most people, it was a time when I was able to cash in“promised” gifts from Christmas or my mother and me were able to take a trip for my spring break. Even as a college student and a young working adult, income tax was just the norm. I understood that they were taken out of your check, and you would get money the following year. It was just a part of life; I didn’t question it because I wasn’t taught that you should.
Now that I’m older and planning for the future my thoughts about the whole income tax refund thing are a bit different. I don’t want one! It frustrates me when I think about all the missed opportunities. Just think about it. Instead of getting that lump sum refund around tax time, what if a portion of that money was given to you in your checks each time you were paid. Granted it wouldn’t be this huge amount, but it could still make a significant difference in your life. You’d be able to save more or make larger payments towards your debt. If you’re paying on the debt, this will reduce the principle and save you on the amount of the interest that accrues over time. By choosing to forgo that lump sum, you’re essentially giving yourself a gift and a better chance at succeeding.
Now that I have identified a problem, the question is how do I fix it. Not pay income taxes? That’s not an option. It is, however, possible to adjust some deductions that are claimed by taking a closer look at your W4’s. If you can find the right level of deductions to cover all income tax obligations, you will see more money in each paycheck and have a much smaller income tax refund in April. We got back a pretty large return last year, and so we both adjusted our W4’s to reduce that amount this year. This year we discovered we’re still getting back too much and so we’ll be making changes again. Our goal is to get back as little as possible or to break even and not owe anything or get anything back.
If you’re not sure where to start, you can talk with a financial professional or accountant that can review your case and ensure that you are receiving all of your money throughout the year. For each person, the scenario is going to be different as you may have a property that you can claim as well as dependents. Some accountants will offer to review your case and give directions regarding income tax for a small fee which can be worth the investment. If you don’t want to go that route, you can use the IRS Withholding Calculator and put in the numbers yourself. It’s always a great idea to explore every option for ways to increase your income so that you can use that money to pay off your debt.
What are some things you’re doing to make sure you’re not getting back a large refund? Did you use an accountant or the W4 withholding calculator? Share your tips in the comments below!