Preparing your tax return can be exciting if you’re anticipating a refund. For many, the process causes more anxiety than excitement. Will you have to pay or will you be getting money back? What if you overlook something and get into trouble? Are there opportunities that you’re overlooking?
Your annual earnings and the taxes you have paid show all your hard work in the past year, and should not be a dreadful time of year.
In the financial advising community, there is an overwhelming consensus regarding the balance owing on your tax return should be close to $0.
This strategy will optimize your take-home pay for each paycheck you receive. If you are refunded a large amount, for example $10,000, this indicates that you are not receiving the maximum amount of pay on each paycheck throughout the year.
Last year, the average US citizen received a tax refund of $2,500. So far in 2021, the average tax refund amounted to $3,021. With the average PA salary around $115,000, this number is typically much higher, likely $5,000 - $10,000. Some financial experts view this as a negative because essentially you are “loaning” the government money instead of receiving the money you are working hard to earn. In the example given, that’s close to $1000 per month you could be taking home, money that could be used to make debt payments to reduce overall interest being paid or for investments which could be realizing gains throughout the year.
How do you typically spend your tax refund?
While getting a big refund check can feel like a fun bonus, studies show that typically tax refunds are not wisely spent. How do you typically spend your tax refund? If you fall into the “splurge purchase” category, this article is for you!
Here are the top 3 ways to use your refund:
Debt: If you have a high-interest student loan glaring at you, put that extra $5000 towards that loan and pay it off! If you suffer from credit card debt, knock that sucker out and save yourself thousands of dollars in interest! There really isn’t a wrong way to pay off debt using your tax refund.
Investment: What would happen if you placed $2,500 of your tax return into a retirement account and adjusted your W2 withholding to gain an extra $200 per month? After the initial $2,500 followed by $200 monthly contributions, in 30 years your account would be worth $780,000! More specifically, that equates to $75,000 of your money and $705,000 of compounded interest growth!
Save: Are you planning a big purchase such as a new home, car or vacation? Proper financial planning removes “splurge purchases” from your vocabulary. Setting money aside for large purchases not only decreases your payments but will also give you a sense of accomplishment for all your hard work.
Let’s be clear, you should reward yourself in life and enjoy your hard-earned money. Splurges can be worked in, they just need to be smart and you need to fully understand the cost of them.
Sometimes forgoing a splurge just once, can lift you out of a high-interest debt cycle and actually afford you a well planned, future expenditure!
Take the time to thoroughly plan your financial future with a trusted professional, who can help you find the right balance.
Maximize your Refund
None of these options are possible unless you take full advantage of the money owed to you by the government.
An experienced tax professional will identify deductions and credits most PAs do not know about.
A tax professional will help you get the largest refund possible and adjust your tax withholdings so you can increase your paychecks and not have to fret over year-end tax returns.
PA 4 Finance works ONLY with PAs regarding their financial future. The PA profession is unique and we understand how to best prepare your financial future. We have Certified Public Accounts (CPAs) who understand our profession, unlike many large firms.
The PA 4 Finance team has been in your shoes and understands the challenges associated with your rigorous training, school debt and demanding professional duties.
Contact us today to see how we can help you achieve your financial goals!