Your Tax Refund Isn’t a Bonus- It’s Your Money
Blog post
02/20/25Are you already planning what you will spend your tax refund on? While it may feel like a bonus, your refund is just the money you overpaid throughout the year. Essentially, the IRS has been borrowing your money interest-free for the past year.
Why a Refund Isn’t Ideal:
Rather than letting the IRS act as an unpaid savings account, you could have kept more of your monthly earnings to cover essential expenses, pay down debt, or invest. Imagine having an extra $1,000 per month—that’s money you could have put to work right away instead of waiting for tax season to get it back. That extra cash could have:
- Helped you build an emergency fund for unexpected expenses
- Allowed you to pay off high-interest debt faster, saving you money on interest
- Given the flexibility to invest in a Roth IRA or other investment account, where even small, consistent contributions can grow significantly over time
- Enabled you to cover major expenses like a home improvement project or a family vacation
Additionally, inflation erodes the value of money over time. The refund you receive today isn’t as valuable as it was months ago.
Avoid Penalties
On the other hand, this doesn’t mean you should withhold nothing throughout the year, as that could result in penalties for under-withholding. To avoid these penalties, you must pay the lesser of:
- At least 90% of the tax shown on the return for the tax year
- 100%* of the tax shown on the prior year’s return.
*(110% If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately)
Adjust Your Withholdings
The goal is to have a $0 tax liability on Tax Day. If you consistently receive large refunds or owe significant sums of money, it may be time to adjust your tax withholdings.
- Call Your Financial Advisor or Accountant. They can help you model your income for the year and calculate the dollar amount you should be withholding from your pay.
- Update Your W-4 – Adjusting your W-4 with your employer ensures that the right amount of tax is withheld from each paycheck, preventing extreme overpayments or underpayments.
By fine-tuning your withholdings, you can maximize your financial flexibility and avoid giving the government an interest-free loan or paying penalties.
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