Filing taxes often feels like a gamble. Whether you do it yourself or pay someone else, predicting the outcome is never easy.
The recent tax overhaul only adds to the confusion and early filers are already lamenting smaller refunds.
When you are counting on a windfall, a paltry refund is more than a disappointment—it’s less cash for the basics. But is getting a large refund a good thing?
Here’s what it means and some better ways to find extra money.
How your tax refund is calculated
Before labeling your tax refund as “good” or “bad,” let’s learn more about it—and where that magic number comes from.
Step one: your tax withholdings
If you work for someone else, you may remember the flood of paperwork after your hiring.
You may have signed up for health insurance, a retirement plan, a disability policy, and more.
It may be kind of foggy, but you also filled out a W-4—a form that tells your employer how much to take out of your paychecks for taxes. You picked allowances based on the form’s attached worksheet.
These allowances were the roadmap for your tax withholdings.
Fast forward to January—your company sends a W-2.
This form includes a tally of how much money they withheld for the year. Tax withholdings are only an estimate. You don’t know your total bill or refund until you file your taxes.
Step two: filing your taxes
Getting all your tax forms takes a while. After weeks of stalking the mail truck, you may finally have a stack of everything you need.
A quick peek at the new Form 1040 may give you an idea of how to calculate your federal taxes.
We won’t bore you with line-by-line calculations.
But if you skip down to the bottom of page 2, you can see a spot for how much you already paid. (For our fellow tax geeks, it’s line 16.)
Your total withholdings are subtracted from your tax bill.
If you overpaid, you can expect to receive a refund. But if your company didn’t withhold enough, you will owe money.
Tip for 2019: Even if you are confident about your W-4, taking a few minutes to double-check your allowances is always a good idea. The IRS makes it easy with their free Withholding Calculator.
Is getting a big tax refund bad?
Now that you understand tax refunds, you may wonder if they’re as good as everyone thinks.
After all, by withholding too much, less cash is available for your other priorities.
You may be eager to pay down debt, save for a new home, or pad your emergency fund.
By letting the government keep extra money all year, you may unknowingly be slowing your progress.
Or, maybe you can’t sleep because you worry about the possibility of owing the government money in April. If withholding more offers you peace of mind, it may not be a bad decision.
There is no “right” or “wrong” way to feel about taxes, but we can all agree proactivity is the best way to avoid surprises. If it feels like too much to tackle on your own, lean on a tax professional.
Better ways to get “surprise” money
You may like tax refunds because it feels like forced annual savings. The problem is, you can’t access your money throughout the year.
There’s an opportunity cost too. While your hard-earned cash lines the government’s coffers, you aren’t earning interest.
Instead of withholding too much, you could leverage the power of automation instead.
Apps like Twine can save money for you. By letting Twine do the heavy lifting, you may reach your dream vacation or new home faster than you expect.