ECONOMY & WORK
MONEY 101
NEWS
PERSONAL FINANCE
NET WORTH
About Us Contact Us Privacy Policy Terms of Use DMCA Opt-out of personalized ads
© Copyright 2023 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.
MARKETREALIST.COM / ECONOMY & WORK

Why a Modest Tax Refund Could Signal Good Financial Health

Having a modest tax refund, perhaps as seemingly insignificant as $18, could actually signal good financial health.
PUBLISHED MAR 11, 2024
Cover Image Source: A tax payer looks at his rebate check | Getty Images | Photo by Spencer Platt
Cover Image Source: A tax payer looks at his rebate check | Getty Images | Photo by Spencer Platt

As tax season unfolds, millions of Americans eagerly await tax refunds, often viewing them as a windfall. However, financial experts are advocating for a different approach; one that involves aiming for a minimal refund, or even owing a small amount. Surprisingly, having a modest tax refund, perhaps as seemingly insignificant as $18, could signal good financial health. Here’s why:

Federal Tax Refund with tax folder and stamped envelope | Getty Images | Photo by Eleanor Ivins
Image Source: Federal Tax Refund with tax folder and stamped envelope | Getty Images | Photo by Eleanor Ivins

Firstly, it’s essential to understand that a tax refund is not a government bonus but a return of your own money. Throughout the year, most employees have taxes withheld from their paychecks, and if this amount exceeds their tax liability, they receive a refund when they file their taxes. In essence, a refund represents money that you could have had in your pocket throughout the year.

Michael Wallace, CEO of Greenback Expat Tax Services, raises a critical question: would you rather have that money throughout the year or receive it in a lump sum later? The answer largely depends on individual financial habits and goals.

For individuals who are disciplined savers or investors, having more money in their paychecks each month can lead to greater financial growth. By adjusting their tax withholding to reduce their refund, they can put that money to work immediately, whether it's paying down debt, investing, or building an emergency fund.

Image Source: Nora Carol Photography
Image Source: Photo by Nora Carol Photography | Pexels

However, for others, a large refund may serve as a forced savings mechanism. This lump sum in the spring can be an opportunity to tackle financial goals that might otherwise be neglected throughout the year. It's essential to recognize one's tendencies and financial behaviors when determining the optimal approach.

For those inclined to adjust their withholding to receive a smaller refund, there are practical steps to take. Filing a new Form W-4 with their employer allows individuals to specify the amount of taxes withheld from their paychecks. Moreover, using the previous year's tax return as a reference point or utilizing the IRS's withholding estimator tool can help determine the appropriate adjustments.

Erika Kullberg, a personal finance expert, suggests an alternative perspective: turning the interest situation in one's favor. "When you look at the interest on high-yield savings accounts, you can earn upwards of 4% or 5%," she says.

"Wouldn’t you rather have that money coming directly into your paycheck and then earning 5% on that money? That’s a great outcome rather than waiting an entire year to get a tax refund," she adds.

Ask your landlord for payout options and communicate in advance. Image Source: Pexels|Photo by Cottonbro Studio
Image Source: Pexels | Photo by Cottonbro Studio

Consider this scenario: if an individual received the average tax refund of $3,213 this year and adjusted their withholding to receive less in their paychecks, they could earn approximately $73 in interest over a year in a savings account yielding 5%. While this sum may appear modest, it reflects a proactive approach to maximizing financial resources.

Opting for a smaller tax refund necessitates careful deliberation and planning. It requires understanding one's financial goals, habits, and the potential benefits of having access to funds throughout the year. "It takes some planning and some discipline, but it can definitely be worth it," says Wallace. "70 bucks is 70 bucks."

MORE ON MARKET REALIST
"It's a lady's robe. A robe from 1750 is a very rare robe. The only other ones I know of this type, you'd have to go to Beijing," the appraiser said.
4 hours ago
Harvey also got other hilarious answers, but nothing could match the woman's sass.
6 hours ago
The Gronkowski family is famous for their contributions to America's sporting culture.
7 hours ago
The expert said that the fossil was well preserved but still wasn't something extraordinary.
9 hours ago
The expert revealed that the jewel was from the late-Victorian era with an exceedingly rare stone.
1 day ago
"I wouldn't have gotten this one at all. I only got "of the curve," but that was it," a fan said.
1 day ago
All of the other sharks said no to the entrepreneurs, but Mr. Wonderful saw value in the product.
1 day ago
The contestant might not have expected to even be on stage, let alone play such a great game.
1 day ago
Everyone in the studio loved the four-legged superstar who stole the show for a few seconds.
2 days ago
The founder of "Eat Your Flowers"just couldn't refuse the offer despite having others on the table.
2 days ago
Rick Harrison had several doubts from the start, but they were all cleared later on by his friend.
2 days ago
A fan also commented that they almost fell off their chair after hearing Rosa's answer.
2 days ago
The guest had also brought a couple of personal telegrams sent by the Palace to the original owner.
2 days ago
"I don't understand how people are not paying attention to the last few plays," a fan said.
3 days ago
More than his product, it was his story and his sharpness that impressed every single shark.
3 days ago
The contestant was embarrassed, but his answer turned out to be on the board.
3 days ago
She was already emotional even before her husband even played the Bonus Round.
4 days ago
Fans on social media were livid and they did not shy away from expressing their disappointment.
4 days ago
Matt quoted $18,000 for 'Anne of Green Gables' but merely paid $25 while buying it.
4 days ago
Carl L. Shy, an Olympian and basketball player, later joined the LAPD and retired as a detective.
4 days ago