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Tax season is in full swing, and many Americans are eagerly awaiting their refunds. The United States Internal Revenue Service in 2018 refunded more than $312 billion, with an average refund of about $2,825 — not small change.1 While some look forward to the annual spring windfall and may have it spent before the check is in hand, that refund may not always be cause for celebration.
“If you’re getting a large refund check, that means you’ve essentially loaned money to the U.S. government throughout the year, and they’re giving it back to you without interest,” said Glenn Powell, a financial advisor with PNC Investments.
There are pros and cons to receiving refunds, but if you had that extra money in your paycheck, rather than funneled to the IRS and then returned at tax time, it could help you achieve some of your financial goals. Here’s how:
If you’re getting a few hundred dollars back in April, there’s no need to rush to adjust your W-4 — the form that tells your employer how much of your paycheck to withhold in taxes. But if your refund is closer to $1,000, $2,000 or even higher, Powell says you might want to consider making some adjustments.
On the W-4, you can claim exemptions for dependents, having a non-working spouse or paying for child care, among other things. So, remember to change your W-4 after a life event, such as getting married or having a baby.
The more exemptions you have, the less earnings will be withheld from your paycheck in taxes. As a result, you may owe money come tax time. On the other hand, the fewer exemptions you claim, the more your employer will withhold from your paycheck. If your tax refund was rather large, you likely aren’t taking enough exemptions.
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