Money // How Big was YOUR Tax Refund?

Okay, I don’t really want to know.

But if it was more than $1000, you may have some things to rethink.

We’ve had some big refunds the last few years. Really big. And while I know in my head that a big refund is bad because it means you’ve been lending the government money tax free all year, it’s still kind of nice to get. This year though, after getting a hefty return back yet again, we’ve decided to do something about it. And you know what? It was pretty easy.

I don’t totally understand Withholding Allowances, but the basic premise is the more Allowances you claim, the less taxes are taken out of your check. My husband and I always assumed that he should claim 2 (one for me, one for our son). It turns out that is actually not the case. The IRS has a handy calculator on their website for this exact purpose. You can find it here. Just be sure you have a pay stub and last year’s tax return to help you out. We used it and it turns out my husband should have been claiming 6 instead of 2. No wonder we’ve been getting such a large amount back!

Taxes are confusing and changing allowances seems terrifying. What if you change them incorrectly and have to PAY or completely mess them up???  If you use the IRS Withholding Calculator and a reasonable estimate, you should be okay (full disclosure- I think I ran the calculator about 14 times with various values to make sure!). An important note- this calculator will tell you what to change your allowances to for the remainder of 2014. It takes into account the taxes you have already paid this year, so you need to be sure to redo your allowances for 2015. I already put my note on the calendar for the beginning of next year.

Once we knew how many allowances we should have been taking, my husband just had to log in to his pay system and update his w-4 information. If your employer doesn’t have an online option, you’ll just need to fill out a new w-4 form at your office.

For us, this change is an increase in our monthly income, however, we are going to have to be diligent about putting the money into savings, since that is where the bulk of our tax return goes. Being disciplined budgeters, I’m confident that we can do this. However, if we weren’t great at saving, it might have made more sense to keep the large tax return as an automatic savings vehicle.

Here’s an example: If your tax return is normally around $4,000, that would be approximately $333.33 extra in your paycheck per month. If you invested that $333.33 into a mutual fund averaging 8% per year and assume it compounds quarterly (this is not exactly how mutual funds work, but will give a good estimate) you will end up with $4,121.57. That means you made $121.57 over the course of a year doing absolutely nothing! If you don’t update your allocation, the government will do something similar and keep the $121.57. It’s great for them, but there is no need to miss out on the extra cash for yourself just because you think changing your allocation is a pain or scary.

I’m so excited to see how much interest we can earn this year!

What could you be using your tax return for during the year? Or what do you use your return for now?