Quit getting tax refunds
Many Americans depend on tax refunds for savings. But you might be better off adjusting your withholding and opening a savings account.
This post is by Kay Bell at Bankrate.com.
That's no secret. Every tax filing season, the Internal Revenue Service notes that most taxpayers get refunds.
But the American Tax and Financial Center, a new undertaking by tax software giant TurboTax, has taken a closer look at this refund trend.
A federal tax refund is the largest lump sum of money received in a year by the typical American household, according to the Center. And based on 2011 and 2012 IRS data, it estimates that around $230 billion in federal tax refunds will be issued this year to American taxpayers.
They'll get this money, their money, eventually -- after the IRS finishes updating forms and its computer system to match the tax law changes Congress didn't approve until Jan. 1.
Because of that congressional tardiness, the IRS is processing returns, and issuing refunds, a bit later this year. And that could cause a lot of people a lot of problems.
Tax refunds, says the American Tax and Financial Center, are especially vital for U.S. households who live paycheck-to-paycheck and who depend on a tax refund to help cover the costs of everyday living.
Forty-two percent of early tax filers plan to use their refund to pay down debt and cover the costs of rent, food and utilities, according to the Center's analysis.
Adjust withholding instead
As longtime readers of know, I am not a fan of tax refunds. I think it's better to have your money in hand throughout the year via proper payroll tax withholding.
But I understand that a refund is an easy, forced savings account. And with interest rates on traditional savings accounts and CDs at just fractional percentage points (thanks for nothing, literally, Federal Reserve!), you're not losing any earnings right now by letting Uncle Sam be your banker.
But you are losing access to your refund money because the IRS can't get it to you as quickly as you'd like.
So just think about adjusting your withholding this tax year. That way a bit of your usual refund will show up in each of your 2013 paychecks.
Sure, Congress might finally get its act together and tax filing this time next year may be on schedule. But we are talking about Congress.
If you're afraid you'll just spend that money that you usually get as a refund, there's a way to save yourself from yourself. Open a savings account and have the amount that you're sending to the IRS via payroll withholding directly deposited in your own account instead.
Since it won't show up in your pay, you won't be tempted to spend it. And I have faith that you can leave that savings account alone until you really need to tap it.
More from Bankrate.com and MSN Money:
Every year some self appointed money person gives this advice. Do NOT listen. Most of us will never notice the few dollar increase changing or deductions would make. Maybe we'll buy an extra coke. but $10.00 a week becones $520.00 in a year. Enough to buy something a little bit nice, start an IRA (make it a Roth), pay a chunk down on the credit card or take your loved one out for a nice evening without putting it on plastic.
I just had my first child a few months back. I immediately opened a college savings plan. The extra tax money I get in my paycheck is going into his college savings plan. So many people are struggling to set aside money to help their children with college, which decreases the chances they'll even go. By putting a small chunk of extra money away now for 18 years, my son will have the vast majority of tuition paid for. This is just one example (of many) of making money work for you.
The problem is that so many people can't see into the future and live only in today. There will come a day when they will need to send their children to college, get their mortgages paid off, retire (unless they want to work the rest of their lives or live on small ss payments), have a down payment for a car, etc. etc. Saving the extra money that can be put into a paycheck by not withholding so much is a fantastic opportunity yet so many people squander it. My sister-in-law goes out and buys TV's, computers, gaming stations, etc. etc. every year with her $6000 refund. Her refund is long gone within a week.
If you have a mortgage, you can shorten the amount of time you're paying interest by upping monthly payments. If you're car is broken down, a sizable down payment can reduce interest paid. If you're going to take out a loan to help your child through college, a little savings now can limit the damage from interest. There is a theme here. This country has one of the smallest savings rates per household in the developed world. Maybe this philosophy is why we are trillions in debt and counting.
Interest free loan to the government....
Extra date with my lady...
High yield self managed stock portfolio...
Low interest savings account...
Really the more I get per check the better.
Might? This is a no-brainer. Poor people receive tax refunds and always stay broke. Smart, financial people receive little or no refund and see their wealth increase.
Keep the weekly difference and buy stocks that pay dividends. If you do not have the will power to save money every week for savings or stocks you are a sad, poor individual who I will probably have to pay for when you are old and have $0 savings.
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