While it is always nice to get a tax refund after you file your federal taxes in the spring, what you are getting back is actually your own money.¬†When putting together a tax toolbox, some people like saving by paying more taxes than necessary during the year so that they get a sizeable refund, and others like to keep as much money in their paychecks as possible during the year. It can be a challenging balance in deciding how much to withhold in deductions when you fill out tax forms for your employment.
Consider what you use your tax refund money for. If you take that money and invest it or plan on saving it, having the lump sum owed to you is not so bad, because that money will be put away to make more money for you. If you like to pay off debt with your tax refund, getting money from the government is also a good thing. Using your refund to pay off high interest credit cards and loans will help you with saving later.
If you look at your tax refund as nothing more than a great and unexpected windfall of money, the concept is working against you. Using the money to make large purchases instead of saving is not the best use of your funds. Some tax preparers are offering loans against your refund, and while it can be tempting to get your money more quickly, they are often expensive.
Saving the money in your paycheck is also an option. Keep the money and pay a bill on tax day if you are good at budgeting and are timely with paying your bills. When you pay more in taxes during the year and then collect a refund, you are essentially saving but also using your money to give the government an interest-free loan. Withhold limited tax dollars from your salary, and use that money to regularly and automatically invest in retirement, education and other saving plans. If you struggle to pay bills on time, however, you do not want to have an IRS tax bill looming over your head. They will be diligent and effective in collecting the money you owe, so if you are unsure of whether you will have the money to pay your bill on tax day, opt for saving more in your withholding and getting a lump sum refund.