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For many Americans, receiving an annual tax refund is something to look forward to.
In fact, it’s common for people to have plans to spend this money soon after it comes.
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Receiving a big sum of money in your bank account from the IRS all at once can feel like a windfall or like something to get excited about. But, Dave Ramsey pointed out recently that getting a refund is actually not a good thing — and he’s absolutely correct.
Here’s why Ramsey believes a tax refund isn’t something you should aspire to receive.
There’s a very good reason not to want a tax refund
Ramsey offered a simple explanation for why you don’t want a tax refund, even though it might be “fun in the moment,” when the payment comes.
“Wouldn’t it be nice to have that increase in income each month instead?” Ramsey asked. “Yes! Then you’re in charge of what that money’s doing instead of the government.”
See, as Ramsey correctly points out here, the refund coming back to you is from extra money you sent the government throughout the year. The money was taken from you out of your paycheck, kept by the IRS for months, and finally returned to you after you filed your taxes.
While the government was holding your money, though, you didn’t have control over any of it. You weren’t able to put it into a high-yield savings account where you could have earned interest or accessed it when you needed it. And you weren’t able to use it to pay down debt faster, avoiding unnecessary interest charges you paid to creditors while the government held your cash interest-free.
Instead of allowing the IRS to just keep your money for you for months because you pay too much, it’s much better as Ramsey suggests to pay less in taxes throughout the year, have that money as your own each month to spend, and then get a smaller refund or even owe a little bit to the IRS at the end of the year.
How to avoid a tax refund
If you want to follow this solid advice from Ramsey and avoid your tax refund, you can do so via a simple approach. Adjust the details on your income tax withholding at work. The IRS has a withholding estimator if you aren’t sure how much is being withheld. Make use of it to determine the minimum you need to withhold to avoid tax penalties, and then tell your employer you want to update the withholding details you provided when you were hired.
Once your withholding is adjusted, your employer will send less money to the IRS on your behalf over the course of the year so you will get more cash in your paychecks. Be sure to use this wisely.
Sometimes, people like a tax refund because then they can make sure they take the lump sum and use it for things like debt repayment or savings. But you can set up automated payments to your debt or transfers to your savings account on payday for the extra amount in your check. That way, you’re benefiting from the money all year long.
Our picks for best tax software
Our independent analysts pored over the perks and user reviews for the most popular tax provider services to land on the best-in-class picks to file your taxes. Get started by reviewing our list of the best tax software.
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