As tax season unfolds, the perennial debate surrounding the size of tax refunds and the optimal withholding strategy resurfaces. The anticipation of tax refunds, often regarded as the year's most significant payday for millions of Americans, brings forth a critical financial decision: is it more prudent to receive a substantial refund or to adjust withholdings for a smaller return?
The crux of the matter lies in the understanding that a tax refund represents an overpayment to the IRS, funds that taxpayers could have utilized throughout the year. While some financial experts argue that a large refund signifies an unnecessary loan to the government, others see it as a forced savings mechanism that can lead to substantial yearly windfalls.
For taxpayers like Andres Olarte, a software developer from Chicago, the strategy leans towards minimizing overpayment to the IRS. "My goal every year is to owe $1,000 or a bit less," Olarte shared, highlighting a desire to retain as much of his earnings as possible without incurring penalties.
On the flip side, the psychological and practical benefits of a sizeable tax refund cannot be overlooked. Mark Steber, Chief Tax Information Officer at Jackson Hewitt, points out the significant impact a lump sum can have, particularly for those who might otherwise struggle with saving. "Money these people get on the single largest payday is life-changing," Steber remarked, emphasizing the potential for refunds to contribute towards debt repayment or emergency savings.
The upcoming tax season brings with it the promise of larger refunds for many Americans, a consequence of the IRS's adjustments to federal income tax brackets and standard deductions in response to inflation. According to Steber, this adjustment, which saw tax brackets shift higher by about 7.1%, will likely result in refunds that are 10% larger than the previous year for those whose incomes have not outpaced inflation.
The decision to aim for a larger refund or to adjust withholdings for more immediate access to one's earnings is deeply personal, hinging on individual financial situations, goals, and discipline. For those contemplating a change in their withholding, the IRS provides a tax withholding estimator tool, allowing taxpayers to gauge their potential refund or amount owed.
As the deadline for tax submissions approaches, the IRS emphasizes the importance of electronic filing and direct deposit to expedite the refund process. Despite the allure of a substantial refund, financial planners like Eric Bronnenkant, Head of Tax at online financial adviser Betterment, advocate for timely filing to put refunds to work sooner, reminding taxpayers that "the IRS doesn't pay you interest on your refunds."
In navigating the complexities of tax season, the choice between a larger refund and adjusted withholdings boils down to a balance between financial strategy and personal preference, underscoring the need for informed decision-making in personal finance.
