Tax Day has come and gone. Take a second to breathe a sigh of relief. But don't pack up your calculator and green plastic visor just yet. Now is the perfect time to make sure you have everything in order for your 2023 taxes.
Namely, you'd be wise to assess your withholding, tax experts say.
Chances are it's been a while. Nearly half — 45% — of American taxpayers have no idea the last time they updated the portion of their pay their employer sets aside for tax purposes, according to a 2020 survey from the American Institute of Certified Public Accountants. To adjust your withholding, you'll have to file a new W-4 form with your company.
This is the moment to consider it, because you have the results of your last withholding choice fresh in your mind. If you instructed your employer to withhold too much throughout 2022, you got a tax refund; too little and you owed a bill.
"Mathematically, you want to break exactly even," says Ed Slott, a certified public account and founder of IRAHelp.com. "But that's hard to do," given that income and other taxable events can be unpredictable.
Still, if your pay doesn't change much from year to year, you can have a pretty good idea of what you'll owe next time based on what you paid this time.
You can use the IRS's withholding estimator tool to give yourself a good idea of your breakeven number. But depending on your financial habits, you may want to adjust to receive a refund or owe a bill, tax experts say. Here's why.
The case against a tax refund: You've given Uncle Sam an 'interest-free loan'
Underpaying your taxes is no fun when it's an accident. Owing a surprise bill at tax time can put a serious dent in your finances in the form of interest payments and penalties. If that was the case for tax year 2022, consider asking your employer to withhold more from each check this year.
Some taxpayers actually prefer paying the balance of what they owe when they file. "Why do people give interest-free loans to the government?" says Stan Veliotis, a professor of accounting and taxation at the Fordham University Gabelli School of Business.
It's not an unfair characterization of a refund. Essentially, the government hangs on to the amount of money you overpay by and returns it to you when you file. Unless your refund hasn't been issued 45 days after the filing deadline, the IRS doesn't pay interest.
Had that money been in your paycheck, you could have put it in an interest-bearing bank account throughout the year, points out Veliotis. "I love to owe. It means I have money in the bank, and maybe I can squeeze out a couple hundred bucks from it," he says. "The goal is to owe, but not so much that you have a penalty."
The case for a refund: You can 'do something worthwhile with' the cash
Plenty of Americans prefer to get a refund, and it's not hard to see why. So far this tax filing season, the average refund issued to taxpayers totaled $2,878, according to the most recent IRS data.
"That's more than a paycheck for many Americans," says Lisa Violet, a CPA and prosperity advocate at Varo Bank. "It's not inconsequential."
Advocates for keeping your refund close to zero argue that you'd be better served having more money in your paycheck throughout the year. If you're constantly strapped for cash, yet received a huge refund this year, it may make sense to direct your employer to withhold less of your check.
With costs going up and personal savings rates on the decline, it might not be such a bad idea to take your refund in a lump sum, says Violet. "If you have that extra money in hand with every paycheck, you may find it just disappears. Having that extra money needs to be matched with extra discipline."
That could mean taking that extra $50 per check and putting it toward goals such as building an emergency fund, paying down debt and investing for long-term goals. If that doesn't sound like you, you could be fine getting the refund.
"It's OK to be paying the IRS too much during the year so that when you get that lump sum, you can do something worthwhile with it all at once," says Violet.
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