Basically, you’ve given an interest free loan to the U.S. Government.
Your goal for taxes every April should be to get to as close to $0 tax refund or tax liability as possible; either you owe very little or your refund is very little. This means you are optimizing your monthly income, and it gives you the opportunity to save and earn interest on those savings.
I’ve come across too many people with the misconception that they prefer their large refunds because they view it as a forced savings. Additionally, they don’t see the money in their accounts and don’t have access to the funds, so this is preferable for them. I say poppykosh!… You are doing it wrong! You are losing money in this instance. If you want to build wealth, then you must take control of your financial life. There are many ways to structure an automatic savings plan, and more importantly one that will make money for you versus the alternative where the government holds your money hostage until you file your tax return.
Your money should always be working for you. Simply, your money should be making money.
Achieving $0 tax liability come the annual Tax Season is relatively simple. If you are a W-2 wage earner, make certain that your W-4 is filled out correctly. It’s important to note that Married couples that are both W-2 wage earners it is advised that they consult with a Tax Advisor because their respective W-4 forms do not account for their Spouse’s income. Their combined income can catapult them into a higher tax bracket resulting a higher tax liability. Furthermore, W-2 wage earners that receive infrequent bonuses will have a challenging task optimizing their tax withholdings.
If you are a partner (Form K-1), a shareholder (Form K-1), or self-employed (Schedule C), then the task may be more challenging. In these scenarios it’s highly recommended that you are working with a Tax Specialist; it will greatly benefit you for tax planning. If you are Married and your spouse also earns income as a wage earner, or K-1, or Schedule C, again a Tax Advisor would benefit you for tax planning.
Don’t be fiscally foolish and overpay your taxes. Take control of your budget and your savings; doing so will result in financial success.