Getting a tax refund may sound great, but tax experts say it’s also a sign that two things could be happening: you may not be doing enough tax planning and you could reduce your salary unnecessarily.
In a recent online survey commissioned by NerdWallet and conducted by The Harris Poll, we asked over 2,000 American adults about their tax refund preferences, knowledge of adjusting their restraint and how they plan to approach their taxes differently in 2019. Here’s what we learned:
About 2 in 5 Americans (42%) would most prefer to pay too much tax throughout the year and get a refund, although that means living on a smaller salary all year round. While a large influx of money can be nice, it’s worth considering whether this is the best decision for your day-to-day finances.
Almost two-thirds of Americans (64%) are unaware that a W-4 is the form used to adjust withholding tax from a person’s paycheck. Almost half of Americans (45%) mistakenly think the correct shape is a W-2. A W-2 details the salary an employee earned and how much tax was withheld from his salary.
More than a quarter of American employees (28%) have never adjusted their withholding tax, and about two-thirds of Americans who have ever filed a W-4 (65%) say they usually only revise their withholding tax when they start a new job. This is of particular concern because the Tax Cuts and Jobs Act of 2017 changed the tax code in ways many people might not have explained.
Half of Americans who file a 2019 tax return plan to do something different this year than last year to prepare for the tax return. About 1 in 5 (19%) follow their cases better, while 17% open a 401 (k) or increase their contributions.
Why Tax Refunds Aren’t Always Great
When it comes to filing a tax return, nearly 2 in 5 Americans (39%) would rather pay the exact amount of taxes they owe throughout the year and not get a refund or owe money after deposit. But 42% would rather overpay their taxes and get a refund.
Tax refunds often occur when people have too much tax withheld from their paychecks. If, for example, your employer withholds $ 400 from your payroll twice a month, you will have paid $ 9,600 in taxes by the end of the year. When you prepare your tax return in April and it turns out that your tax payable for the year was only $ 4,000, you might consider a tax refund of $ 5,600.
It sounds good – until you think about what life could have been like if you had had that $ 5,600 in the course of the year. It’s about $ 467 per month that you could have had to shop for groceries, pay your bills, get the car repaired, pay off a loan or credit card balance faster, or invest for the future.
How to keep more of your money
There are two ways to avoid paying Uncle Sam too much up front.
1. Estimate your tax payable
Estimating your tax payable can mean using a tax calculator, talking to a tax advisor, or looking at your previous tax returns. Ask yourself if you are making any changes in your life that could affect your tax situation, such as buying or selling a house, having a baby, starting a business, or getting married or divorced. Many brands tax packages also have modules that can help you predict your tax liability.
There are many ways to reduce your tax liability, and some Americans are taking advantage of them this year. According to the NerdWallet survey, half of Americans filing a 2019 tax return (50%) plan to do something different to prepare for the tax return compared to 2018, such as start contributing or increasing contributions to one. 401 (k) (17%), IRA (9%) or health savings account (9%), each of which could reduce your taxable income.
2. Adjust your W-4
Instead of waiting until tax time to recoup a large chunk of your paycheck through a refund, you can give yourself an immediate pay raise by reducing your withholding taxes to a level that more closely matches your estimated tax liability. for the year.
You can make the change by complete a new W-4 form and give it to your employer. Some employers even allow you to do this online; ask your HR representative for more details. A W-4 tells your employer how much tax to withhold from each paycheck, and your employer then remits the calculated amount to the IRS on your behalf.
According to the NerdWallet survey, about two-thirds of Americans who have ever filed a W-4 (65%) say they usually revise their withholding tax only when they start a new job, but you can change your W -4 at any time. It is also a good idea to reassess when important events occur in your life or work.
Methodology of the survey
This survey was conducted online in the United States by The Harris Poll on behalf of NerdWallet from June 25 to 27, 2019, among 2,030 American adults aged 18 and over. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For a complete survey methodology, including weighting variables and sample sizes of subgroups, please contact [email protected].