It might seem like a dream come true when you get that big tax refund, but it’s not always as good as it seems to be. While you’re too busy forming an elaborate plan on all the things you want to do with your money, you could be missing a much deeper implication of this situation.
Before you celebrate that return, think about it this way: the reason you are getting a refund is that you deliberately paid too much taxes in the previous year. Meaning, you had a greater amount withheld from your pay all throughout that year.
The disadvantages of paying too much or too little in taxes go both ways. Because on the flip side, if you withhold too little, or you get to take home a larger amount of your pay, you might end up owing the IRS.
One thing you can do to stay on top of your taxes is to look at your income tax return from the previous years, your Form 1040. This document could provide more insight and help plan how you will move forward. Another factor you should also consider is your income, and whether or not there are changes to how much you are earning. You might have paid more in taxes because you had an increase in your salary.
If you’re not sure what to do, it’s better to ask tax professionalsLooking over your Form 1040 may help you plan your next movesBigger tax refunds may mean that you overpaid your taxes.
Aside from reviewing your tax returns and keeping track of your income, you can also try different ways to help lighten your loads such as having health savings and flexible spending accounts. These could help you pay less in taxes in the future.
In an ideal scenario, the taxes withheld from your pay should be enough to cover your tax liability. And there are several ways that can help achieve this goal. You can make use of the withholding calculator from the IRS, you can talk to a tax professional if you are not sure how to go about some things, since this matter can get kind of tricky, and it’d safer to be sure that you are paying the correct amount.
It might be quite a challenge to stay on track of your finances, however, there are definitely ways that you can do to make sure you are aware of your financial situation and you are capable enough to handle it. It pays to make an effort to be well educated on these matters to avoid getting into trouble in the future.