For many, filing a tax return is an arduous task, but one that will be rewarded with a little extra income in the form of a refund. However, there may come a day when your refund isn’t quite as large as you expected.
In most cases, the reason behind a small refund is relatively simple—it’s all in the withholding. Withholding is not an exact science. Based on certain factors about your life and the number of dependents you claim, the IRS estimates how much you’ll owe in taxes at the end of the year, and this amount is then withheld from your pay. If not enough money is withheld to cover your tax burden, you’ll owe money. If you have more money withheld than you end up owing, the IRS will issue a refund of the difference.
If your tax refund is smaller than you expected, or if you owe money, one simple answer is that you didn’t withhold enough money throughout the year. However, if you haven’t changed your withholding requirements, but your refund this year looks different than last year’s, the change is most likely due to a life event. Did you earn extra income last year? Is one of your dependents now independent? Have you stopped paying interest on a mortgage or student loan? If you’re looking for a reason why your refund is smaller, changes in your life are a good place to start.
Should I withhold more?
Generally, it’s not a good idea to withhold more from your paycheck in the hope of getting a bigger refund next year. Though it’s nice to get a refund and have some extra money in the spring, having the IRS withhold more of your money throughout the year is generally a bad investment. Essentially, you’re letting the IRS keep your money interest-free. The better investment would be to forego withholding entirely and invest or save that extra money coming in every paycheck—though, of course, this means you’ll have to cover the entire amount you owe in taxes the following year without the cushion from withholding. If you can’t quite let go of the idea of getting a refund, or don’t want to worry about having enough money to cover your tax burden at tax time, it’s best to continue withholding enough money to cover your tax bill—but to do so modestly.
How can I get money back?
Looking for extra deductions is perhaps the most obvious way to increase your tax refund, other than withholding more money. But, there might be another way to profit off your tax payment.
As mentioned earlier, investing the money you would normally have the IRS withhold is a great way to earn a different kind of refund. Obviously, earnings on different programs will vary based on what you choose to invest in, but even earning a few percentage points will lead to extra money in your pocket—on top of the principal you’ve invested. Even if you don’t earn much, it’s better than not earning anything at all. And, if an emergency expense comes up during the year, you’ll have access to the money because you’ve invested it in your own account instead of having the IRS withhold it.
In addition to earning interest, if you chose to invest in a tax-exempt college or retirement savings fund, you can earn while also investing in an account that is going to be a tax deduction for you in the following years.
If, after doing your taxes, you think there’s a problem with your tax refund, it might be a good idea to look not just at the refund itself, but at your own spending and saving practices. Focusing on investing your money rather than withholding and splurging is often a better financial plan in the long run.
Please note that the ideas in this article are general principles and not financial advice. For more information on your tax refund, investment strategies or any other financial questions you may have, stop by any FSU Credit Union branch or call (850) 224-4960 (Tallahassee) or 877-GO-FSUCU (Toll Free).
*The content provided in this article consists of the opinions and ideas of FSU Credit Union, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. FSU Credit Union disclaims any damages or liability for decisions you make based on the information provided.