I have to start this post off by saying two things:
- I’m not an expert in anything taxes (law, prep, finance, etc.). I’m also not an expert in death, but that really doesn’t relate to this post.
- I’m not giving any advice, simply making observations.
At the start of every new year, I begin to get a little confused about how people talk about their taxes and tax returns. It seems incredibly common for people to treat their tax returns like a paycheck, but the reality is this:
A tax return is a refund of money that you already paid to the government. It’s money that you overpaid to the government.
Taxes often get taken straight out of your paycheck from your employer at a withholding rate you selected in your first day paperwork. That rate is the best estimate they can make of how much you’ll owe for how much you earned at the beginning of the year. When you pay too much in taxes, you get a return. That means that the government has had that extra money you paid them to “play with” for a year.
As long as you understand that your tax refund is in fact a refund and not free money from Uncle Sam, you’re good.
There are a couple of viewpoints that we ended up chatting with our financial adviser about last year at tax time:
- Pay either exactly what you owe throughout the year or a little less so that at the end of the year, you actually owe on your taxes. This lets you take the money that you earned and make it work for you, at least until April 15th. Even investing what you pay in taxes in a simple savings account, you can earn a little interest on your money.
- Use tax refunds as a savings account and have more withheld from your paycheck so that you aren’t able to touch the money all year and at tax time, you can make a big purchase. If you know that you wouldn’t be able to not touch the money in your own savings account, that’s probably a good way to go.
Hi Rachel. You’re right that it’s actually a refund and not free money, and that’s why it’s so important to get it back!
Here in Ireland, tax refunds are frequently overlooked – it’s a shame because it can really help if you’re struggling. I actually published an article on the subject myself recently if you’d like to check it out: http://www.winterwisdom.com/unclaimed-tax-refunds-extra-cash
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