Tax season is in full swing, and millions of Americans are waiting with baited breath for their refund check.
Many people refer to the day their refund comes through as the ‘biggest payday of the year.’
The amount Americans have received in rebates has been rising year-over-year, according to Internal Revenue Service (IRS) data. For the 2022 season, the typical taxpayer got back $3,012.
A refund is money that you overpaid to the IRS through paycheck withholdings, which the agency has been holding until you file your tax return.
Experts warn that, while a refund may seem like a windfall, overpaying taxes means missing out on using the money during the year.
They say it could be spent on family and friends in the holidays – or invested so it grows in value. At the same time, too much tax up front provides the IRS with an ‘interest-free loan.’
The amount Americans have received in rebates has been rising year-over-year, according to Internal Revenue Service (IRS) data
With every paycheck, your employer withholds some of your earnings for taxes such as Social Security and Medicare, and the amount depends on how much you earn.
‘Experts are saying that we have to change our mentality about tax refunds and remind ourselves that it is our money to begin with,’ Rebecca Chen, reporter and CPA, told Yahoo! Finance.
‘And when you have too much withholding with the government, it is essentially like giving them a interest-free loan throughout the year.’
This is quite a big deal, she added, because we are living in a very high-interest and high-debt environment.
At its latest meeting last month, the Federal Reserve kept interest rates at a 22-year high between 5.25 and 5.5 percent, where it has been since last July.
This has a knock-on effect on mortgages and credit card loans. The average credit card interest rate has soared above 24 percent, according to Lending Tree.
If you are one of the people who are seeing your credit card balances go up and seeing high-consuming debt, Chen said, it does not necessarily make sense to withhold with the government while paying such high interest.
‘Lower your withholding and use that money to pay off your high interest rate credit card debts and you’ll be better off financially,’ she said.
If less is taken out for taxes, it means you will have more in your paycheck each month which you could invest or put in a high-yield savings account.
If an average refund of $3,000 was placed in a high-yield account with 5 percent interest, this would make $150 throughout the year.
Rebecca Chen, reporter and CPA, told Yahoo! Finance, said experts are warning Americans need to change their attitude around tax refunds
But others argue that people look forward to receiving a large chunk of money in a refund – which they then go on to spend wisely.
According to a National Retail Federation survey, half of the people who expected a refund last year planned to save it, one third said they would pay down debt, and 28 percent said they would use it for everyday expenses.
If Americans received that money in their paycheck every month, they might immediately spend it instead, Mark Steber, chief tax information officer at tax preparer Jackson Hewitt, told USA Today.
‘The money these people get on the single largest payday is life-changing,’ he said.
He noted that as savings rates for many of the major banks linger around 0.5 percent, this would only garner an extra $15 dollars on the average $3,000 refund.
Some experts warn that while a refund may seem like a windfall, overpaying taxes means you are missing out on funds you could have had during the year to save or invest
If you withhold too much and pay too little over the course of the year, however, you will be charged an underpayment penalty.
Generally, Americans must pay at least 100 percent of last year’s tax or 90 percent of this year’s tax to avoid a fine.
To work out roughly how much you might owe or get refunded, you can use the IRS tax withholding estimator.
You will need your pay stub – and your spouse’s, if applicable – a recent tax return, and information including your filing status, income and any deductions you are planning to take.
Chen warns that many people do not realize that you can change your withholding throughout the year.
You can complete a W-4 form and submit it to the HR department at your work – and you should be able to do this as many times as you want throughout the year to adjust for changing in your living situation.
‘It should be reflected within your next paycheck,’ she said. ‘So it’s a quick and simple process for taxpayers to know.’
