Who doesn’t love getting a tax refund? Well, actually, the reason most Americans get excited about these checks is due to a basic misunderstanding about what they are. While some may like to believe tax refunds are free money from the government, the truth is that they’re exactly what their name implies: refunds — meaning they’re simply returning the money they shouldn’t have taken in the first place. A major reason for this phenomenon is due to how your taxes are withheld, which is why now is a great time to reassess how much the IRS is taking from each paycheck.
Flashback to when you were first hired at your current job and likely filed out a W-4. That document is what has dictated your tax withholdings the entire time. Because of this, life changes you’ve had may not be accounted for, thus the overpayment on a bi-weekly (or weekly) basis. Luckily this can easily be changed.
Following the passage and implication of the new tax law, the IRS has updated their online withholding calculator, which you can use to determine what your paychecks should look like. As IRS Commissioner David Kautter explained to CNN Money, “Withholding issues can be complicated, and the calculator is designed to help employees make changes based on their financial situation. Taking a few minutes can help taxpayers ensure they don’t have too little — or too much — withheld from their paycheck.” That’s right — by not keeping your withholdings up to date, you also run the risk of being surprised by a tax bill when you go to file, giving you even more reason to double check your W-4 now.
If you enjoy receiving large tax refunds, you’re certainly not alone. In fact, some workers may purposely have the government withdraw extra cash from their checks as a way to force themselves to save. Unfortunately, that plan can also backfire if you allow yourself to splurge once your refund arrives. Moreover, that extra cash could be put to better use and make you more money instead of sitting in the hands of the IRS for several months.
With the new tax law taking effect and the 2017 tax deadline fast approaching, now is definitely the time to review your current withholdings. After checking the IRS’s online calculator, ask your human resources or payroll department how you can file a new W-4 if need be. Just remember, while the results may mean a smaller tax refund in the future, it could also mean more money in your pocket right away.