Refunds are No Measure of Total Taxes Paid!

May 2, 2019

You may get a smaller refund this year but actually pay less in taxes.

The IRS issued new withholding tax tables last year that took into account the lower rates from tax reform as well as the much higher standard deduction. However, they didn’t fully factor in the loss of certain personal exemptions or cutbacks to itemized deductions. Changes were made to minimize under-withholding…and over-withholding, which in prior years led to larger refunds or perhaps smaller tax bills at the end of the year.

The Kiplinger Washington Editors sum it up clearly. “For many taxpayers, less income tax was withheld from paychecks in 2018. These people may have seen a bump in their net pay compared with 2017. Now some of them are dealing with a new reality when they file their 1040s: Smaller refunds or maybe even having to write a check to Uncle Sam for the first time because federal taxes withheld are less than their actual tax liability. The IRS tried to alert the public to these changes but many simply ignored it.

Kiplinger goes on, “Experts say most people’s federal income tax liability will actually be less, and adjusting withholding tables to account for the perennial over-withholding of taxes and in turn, lowering tax refunds isn’t necessarily wrong.” In fact, we recommend planning your tax withholding or quarterly payments so that you “break even” or even owe a little tax at the end of the year.

Most personal financial planners generally advise against getting large refunds when filing returns. You are essentially providing a no-interest loan to the government when you overpay taxes resulting in a refund. You wouldn’t overpay any vendor or merchant during the year just so they could use that money and pay you back later! Why would you do that for the Federal Government?

Try not to look at your annual tax refund as a little windfall but rather the size of the over-payment you made. In most cases, overpaying is an error and paying your taxes is no different.

If you have any questions about how to better manager your annual taxation through proactive tax planning, feel free to contact us online or give us a call at (603) 232-7436.

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