Well, you’ve done your taxes and you breathed a sigh of relief when you saw you were getting a refund. Great, right? No, not really. When you receive a refund, especially a large refund from the IRS or your State taxing authority, you are in essence losing money. What, losing money? Yes, you are losing out on the interest that you could have earned on that money. You have given the taxing authorities an interest-free loan. If you owe them money, do you think they’ll waive the interest because in years past you gave them an interest-free loan? Absolutely not, they’ll stick you with interest and penalties.
So, what do you need to do to avoid a large refund? Adjust your withholding amounts on your paychecks. Go to your HR department or if they offer it online, adjust the withholding by claiming more exemptions on your Form W-4. Base your withholding amount on the taxes you paid the previous year. There shouldn’t be too much of a change.
You might be saying, but I count on that refund for taking a vacation or for paying debt. Stop it! You need the money throughout the year. Use that extra money and pay down your debt. If you don’t have any debt, then start investing the money. Make compound interest work for you.