According to the IRS, the average tax refund this year so far is around $2,000, about a 2% increase over last year. I often hear people asking one another “how much was your refund this year” and most people proudly respond by stating the dollar amount of their refund. I cringe when I hear this conversation. They don’t realize that they have provided our federal government with an interest free loan. The IRS will not do this for you! But, more importantly, they overpaid their income taxes by approximately $170 per month, primarily through excessive payroll withholding, or quarterly estimated payments, resulting in significantly less cash flow. These amounts should have been directed into some appropriate type of savings vehicle or paid down credit card debt.
Most people do not discuss the amount of their total tax liability (the amount of tax based on your taxable income before any payroll withholding or quarterly estimated payments) but discuss the amount of their refund or how much they owed. To a great degree, you control the size of your tax bill every April 15. Strategic tax planning throughout the year can decrease your tax liability. Also, if you consistently receive large tax refunds from year to year, decrease your withholding exemptions (ask your employer for Form W-4) or decrease quarterly estimated tax payments.
