Tax refund season. It’s still a ways away, but some of you are already planning how you will spend your refund. So what are you going to use yours for? Perhaps a new car? Better yet, take that trip that you’ve always wanted to take. After all, you’ve worked hard and you deserve a vacation! Well, whatever you are planning to do with your tax refund I want to help you get the best tax refund ever. After reading this article not only will you have extra money in your pocket, but come February, you will get the best tax refund ever!
Before we learn how to get the best tax refund, lets first understand how taxes work. As an employee, taxes are taken out of your paycheck every time you get paid and then you received what’s remaining. Those taxes are paid directly to the state and federal gov’t on your behalf. This cycle happens for the entire year and then comes January of the following year you file your tax return for the year past. By filing your tax return, you find out exactly how much you owed after deduction, exemptions, credits, etc. The government then does this simple calculation:
(How much you paid) – (How much you owed) = Tax Refund.
So what’s the best tax refund you can get? $5,000? $10,000? The best tax refund you can receive is $0. I know, I know, some of your faces just hit the floor so let me explain. A tax refund is simply the government giving you money back that you overpaid. In essence, THEY ARE GIVING YOU BACK WHAT’S YOURS IN THE FIRST PLACE! When you overpay taxes, I want you to think of it as giving the government a 12-month interest-free loan. I don’t know about you but if I loan out money I want to be paid back interest because a dollar tomorrow is worth less than a dollar today (time value of money).
Now that you know a huge tax secret, how do you stop overpaying the government and keep more money in your pocket throughout the year? Simple, remember all that paperwork that you blindly filled out when you started your job? Well in those piles of paper there was a form called the W-4 form. Form W-4 is basically a worksheet that determines how much taxes should be taken from your paycheck. There is a section in the form where you select the number of allowances you want and based on this selection will determine how much taxes are taken out of your paycheck. Simple rule: the fewer allowances you select, the more taxes they take. See below for a quick summary:
If your parents claim you: Zero
If you’re single and have one job: You should typically claim two, but some people choose zero or one to increase their refund at the end of the year.
If you’re married with kids: Between you and your partner, you should claim a total of three allowances if you have one kid. If you have two kids, claim a total of four (one for each family member).
If you’re married without kids: In total, you and your partner should claim two allowances.
To learn more about how to fill out form W-4 click here.
Word of Caution: Do not select substantially more allowances than you qualify for. You will end up will a massive tax bill that you haven’t saved for. To learn more about properly selecting allowances for your specific situation consult a tax professional (like me 😊).
In closing, giving the government an interest-free loan doesn’t sit well me, but this is not the case for everyone. For some, this is a great option! If you are a lousy saver and don’t trust yourself to save money on your own, giving it to the government as your personal savings account can be a great way to trick yourself into saving. Just make sure this doesn’t disable you to contribute to your 401k or build emergency savings.