How’s That Refund Working For You?

1040-tax

It’s tax time, if you didn’t know already, the time to file your yearly return to the government. Having just completed ours, I was excited to see how close my predication was. It’s always a time where most people including myself, hope that they will get a refund. I’m no different, I dislike having to owe the government money, but how big should your refund be?

Most of us understand the fact that the money we get back is our money that we lent the government interest free. The problem is, that we don’t understand this has bigger consequences than that. We are actually losing money. One word, inflation.

If you have never heard of inflation or don’t understand it, I wrote about it here. According to the CPI index, a measure that looks at a basket of goods to see how those prices have increased last year there was a small increase at a rate of 0.8%. That means in theory, everyday items that we buy, have increased by 0.8%  in price. Now I know that may not sound like a lot, but what happens if inflation is 5% or 6%. Every year these tiny amounts add up.

Still with me?

When we get a refund we get the money a year later. This means inflation has taken hold of it and if for example we got back $1,000 when inflation was 0.8% it would only be worth $992 now. The very simple example is groceries. When you go to the store you may not notice it, because it is gradual, but most items increase in price from year to year.

But, what were to happen if you were to set the money aside during the year instead of waiting until the end for the refund? Do you think you could not only have control of your money, but potentially make it grow by investing it?

The trick is not to get your refund so big that you get a lot of money back, but also not to owe, the sweet spot is a little bit back. It’s about being in control of your money.

Now, if you are using a tax professional they should be helping you predict what your taxes might be for next year. If they can’t do this, you can do it yourself with these simple tools.

1040 Calculator

This calculator is a way to simulate your tax return for next year. It can be complicated if you don’t understand how to use it, but potentially a great estimator. Bankrate has a calculator here.

W-4

That’s right its the form that you give your employer to adjust your withholdings. They amount you should fill in the box of the form can be difficult to calculate. Turbotax has a great detailed estimator here.

Tax Professional or Financial Advisor

Believe it or not the person doing your taxes or even your financial advisor can produce an estimate of your taxes, given the information you share with them throughout the year. Why not use them to get a better idea and get more in line with a better estimate?

Getting money back can feel great. In fact, most of us would like to get money back, even if we have been setting money aside knowing we owe. But, there can be downsides to doing this and if you want to continue working toward being in total control of your money you may want to start thinking about the above.

Do you estimate your taxes for the year? Or do you just hope and wish?

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