Tax season! If you have ever worked, you know how exciting tax season can be. Most people in high school or college will receive a refund whenever filing their taxes. Today, I will tell you why you get money from the government, and then I will tell you how to get the most money back during this tax season. I'll also tell you why a tax refund is a bad way to loan your money to the government.
HEADS UP! You can't get a refund unless you have an income. Also, it's extremely likely that you can't get one if you didn't pay taxes on your income.
Why Do I Get a Tax Refund?
You gave the government too much money. Whenever you went to work, you filled out a "W-4" form. This W-4 asks you a series of questions such as whether you're single or married, a dependent or independent, and if you have any dependents (children) of your own. For every question you answer yes to, you enter a 1 in the line next to it. Then you total up the numbers at the bottom. The total numbers represents the number of "deductions" you take off your taxes. The more deductions you have, the less tax responsibility you have. For exact amounts, go to www.irs.gov and check the current deduction amount. For example, if the deduction amount is $6,300, and you have four deductions, you will have $25,200 less taxable income. If you make $60,000, it is like you just made your income into $34,800. Get it? Good!
The less deductions you claimed, the more taxes that will be withheld from your checks. Typically, you have social security, medicare, federal taxes, and state taxes taken out. There may be even more depending on where you live. In addition to all this, your retirement savings (401k), pension, medical insurance, and other voluntary costs will also be taken out of your check. However, not all these are taxed like your normal income. Just keep all these things in mind whenever your check was supposed to be $2,000 but it actually was $800.
How to Get the Most Money Back on Your Tax Return
Claim the least amount of deductions on your W-4. This will ensure that you overpay for your taxes. You are shooting for 1 deduction claim at the maximum with this approach.
Why Should I Consider Not Getting a Tax Refund?
Investing. I recently wrote a post about investing here. Whenever you give the government your tax money, they are keeping it for up to a year. Instead of giving the government your extra money, why don't you put it to work in index funds?
If you aren't the risky kind of person, you could put your money into a high-interest savings account! You could be earning ~1% of your money back in interest. Think of it this way: Say you overpaid $3,000 on your taxes. 1% of $3,000 is $30. That leaves you with $3,030. Save again the next year. You despoit $3,000 again. You still have the $3,030 from the last year, plus 1% interest. Now you have $6,090.30 due to interest. If you keep this up, you see how it can really stack up.
If you want to really make your money go far, invest in a retirement account such as a 401k or IRA. More on these later. I know I keep saying I'll talk about them but haven't yet. Don't worry, I will!
Thank-you for reading this article. If you have any questions, please comment them below!
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