Get a Refund? You Could Be Overpaying Uncle Sam

Most people like the idea of getting a tax refund, seeing it as a form of forced savings or a windfall for a much-anticipated splurge. But a tax refund is actually a no-interest loan to the government. As a result, if you get a refund annually, it may be time to reconsider your withholdings and take action.

As of May 9, 2014, the IRS had received more than 136 million individual income-tax returns, according to the Wall Street Journal, and the average refund was $2,693, up 1.6 percent. Granted, an extra $2,693 in your pocket isn’t usually considered a bad thing, but certain taxpayers may want consider whether they should have that money earlier in the year.

For example, many people making estimated-tax payments – on self-employment earnings, interest, dividends, and rental income – are overpaying. Others simply have their paycheck withholdings set too high. If you fall into one of those categories, you may want to consider whether there are better ways to use the money you’re loaning to the government.

Could you pay off debt, for example? Could you bolster your savings account and let the earnings accrue interest? Could you invest in bonds or stocks that have the potential to appreciate? Could you contribute to an Individual Retirement Account or 401(k) plan?

It’s easy to file your return and forget about your taxes until next April 15, but now is the best time to review your tax situation. Your advisor can help you determine the appropriate amount to withhold.

Note: This article is not intended to give legal or tax advice.