Understanding the Importance of Tax Withholding and Refunds
When it comes to taxes, many Americans look forward to receiving a large refund as a sort of annual financial windfall. However, experts caution that a significant refund might not always be the best outcome. A large refund could indicate that too much money is being withheld from your paychecks throughout the year, effectively leading to an overpayment of taxes. While getting money back might feel like a bonus, it’s essential to understand how tax withholding works and why aiming for a more balanced approach might be more beneficial in the long run.
The Risks of Overpaying Taxes
David Alvarez, a financial advisor with PAX Financial Group, emphasizes that a sizable refund often means you’re overpaying taxes during the year. "I typically don’t want our clients to be getting a huge refund," he explains. "If you’re overpaying, it’s not like the government pays it back with interest." Overpaying taxes means you’re essentially loaning money to the government without earning any interest on it. This could tie up funds that could otherwise be invested, saved, or used for essential expenses. On the other hand, underpaying taxes can lead to penalties and unexpected bills during tax season, which is why striking a balance is crucial. Alvarez suggests that the ideal scenario is to owe nothing or receive a small refund, a concept he refers to as being "net zero."
Taking Control of Your Tax Withholding
Fortunately, there’s a way to make tax season less of a surprise. By closely monitoring your tax withholding and liability throughout the year, you can avoid overpaying or underpaying taxes. Keeping track of this information, either by writing it down or consulting a tax professional, can help you estimate how much you’ll owe or receive during tax season. This proactive approach not only helps you avoid surprises but also ensures you’re making the most of your money. For those who struggle with saving, increasing tax withholding can be a disciplined way to save money, but it’s important to use the refund wisely. For example, you could put the money toward high-interest debt, emergency savings, or retirement contributions.
Navigating the 2025 Tax Season
The 2025 tax season officially began on January 29, 2024, with the deadline for filing set on April 15, 2025. Missing this deadline could result in penalties, but taxpayers who need more time can file for an extension by submitting Form 4868. This extends the filing deadline to October 15, 2025. The IRS processes most refunds within 21 days of filing, with direct deposits typically arriving faster than paper checks. As of January 31, 2025, the average refund amount was $1,928, up from $1,395 during the same period in 2024. To check the status of your refund, the IRS offers an online tool called "Where’s My Refund?" which provides updates within 24 hours of e-filing or four weeks after mailing a paper return.
Making the Most of Your Refund
While a large refund might seem like a financial bonus, it’s important to use the money wisely. San Francisco wealth advisor Rachel Elson advises that if you choose to over-withhold taxes for a larger refund, you must commit to using the money productively. "If you’re going to do that, then you have to commit to doing something productive with the refund money," she says. Elson recommends using the funds to pay off high-interest debt, build an emergency fund, or contribute to a retirement account. These strategies can help you make the most of your refund and improve your overall financial health.
Avoiding Delays and Maximizing Benefits
To avoid delays in receiving your refund, the IRS recommends taking advantage of its online tools and ensuring all forms are accurately completed. Additionally, some Americans may be eligible for unclaimed tax credits, such as the $900 tax credit or the $7,830 Earned Income Tax Credit (EITC). These credits can provide significant financial relief, but they require proper documentation and eligibility. By staying informed,Double-checking eligibility, and seeking professional assistance when needed, taxpayers can navigate the tax season with confidence and make the most of their refund or owed amount. After all, tax season doesn’t have to be a mystery—it’s a process that, with the right approach, can be managed effectively.
