Repost: Why you shouldn’t celebrate that big tax refund

For most taxpayers, getting a chunk of refund from their taxes is a big thing. However, according to the source from CNBC, it is not an effective use of your cash flow. Find out why:

  • As of the first week of the filing season, the IRS issued an average refund of $1,865. That’s down from $2,035 last year.
  • The new tax law lowered individual income tax rates, roughly doubled the standard deduction, and limited itemized deductions.
  • A large refund suggests you overpaid on taxes in the prior year.

 

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If you are among the taxpayers expecting a refund this tax season, hold off on the champagne for a moment: A big check from the IRS isn’t necessarily good news.

The taxman kicked off the new filing season on Jan. 28, marking the first time taxpayers will be submitting their returns under the Tax Cuts and Jobs Act. The agency predicts it will receive more than 150 million individual income tax returns this spring.

In just the first week of the new filing season, the IRS has sent out 4.6 million refunds to early birds.

The average refund check as of the week of Feb. 1 was $1,865, according to the IRS, which in turn set off howls of protest on social media from taxpayers who were expecting at least what they got last year.

Though there’s no denying the feel-good factor of getting a fat check from Uncle Sam, it means you’ve likely overpaid your taxes during the prior year.

“A large refund from the IRS may seem like an advantage, but it isn’t the best or most effective use of your cash flow,” said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co.

"You're basically giving the IRS an interest-free loan," he said.

Balancing withholding

If you are an employee, when you were hired your employer gave you a Form W-4, which you can use to tweak the amount of tax that’s withheld from your pay.

On that sheet, you can list the number of personal allowances you claim for your household. For instance, you can claim an allowance each for yourself, your spouse and your dependents.

Tread carefully: The more allowances you claim, the less tax you will have withheld.

If you underpay your taxes during the year, you’ll likely owe when you file your return.

“Some people read the form and think, ‘I’m married and have three kids,'” said Cari Weston, director of tax practice and ethics at the American Institute of CPAs. “They end up with five allowances and owe substantial taxes at the end of the year.”

To make things even more complicated, the IRS has adjusted its withholding tables and Form W-4 to reflect the changes from the Tax Cuts and Jobs Act. The agency has also released a new tax withholding calculator.

Because of the new tax law’s increase to the standard deduction and the elimination of personal exemptions, now might be the best time to review your Form W-4 to see if you’re withholding the appropriate amount of tax.

 

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