Get a Big Refund this Year?
The IRS estimates that approximately 70 million Americans received or will receive tax refunds this year averaging around $1,700. If you are among those who received a refund, you are probably celebrating. While some consider a large refund cause for celebration, it's actually a financial mistake that becomes particularly costly for those who get refunds year after year.
What's wrong with a refund you ask? Well, it means you've overpaid your tax all year. That's actually your own money you are getting back and you made an interest-free loan to Uncle Sam. Such unintended generosity costs you more than you might imagine. Consider what would have happened had you instead invested $141.67 per month into an investment program such as a mutual fund, your credit union, an IRA, etc., rather than overpaying the IRS. For example, assuming your chosen investment returned 8% compounded monthly, Instead of waiting for a $1,700.00 refund check in April, you would have had about $1,803.60 in your investment account on April 1st. That's $103.60 more – with no waiting. And, if you are the type who gets refunds of this magnitude each year, you would have forgone even more in compound investment returns.
The alternative is to pre-plan your annual prepayments through withholding and quarterly estimate payments so they more closely match your projected tax liability for the year. Your withholding is generally adjusted by changing the number of allowances claimed on the W-4 Form you turn into your employer. The more allowances, claimed the less the withholding. However, be careful that you do not claim too many and end up owing Uncle Sam at the end of the year. You should always double check your payroll deductions once the change has taken effect to insure the proper adjustment has been achieved.
Let this firm assist you in projecting next year's taxes and adjust your withholding allowances. Please call for assistance.
E Thomas Associates Inc. is a registered investment advisor in Kentucky.
Dave Smith & Tony King are Registered Representatives of and securities are offered through Dalton Strategic Investment Services, Inc., member FINRA & SIPC. 6408 River's Edge Rd, Greenville, OH 45331
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