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recently instagram postMoney expert Vivian Tu recently spoke to her audience about a topic that is currently on many people’s minds: tax refunds.
While it may seem like common sense that someone would be very happy to receive a larger amount as a tax refund, TU made it clear that it is actually better to receive a smaller refund (or none at all).
Also see three tax questions that sound small but change your refund in a big way.
Why getting a lower tax refund shows you’re doing your taxes correctly
Setting up a one-woman play in which Tu played both roles, a very happy man talking to his friend about his $1,500 tax refund this year, the finance influencer outlined a compare-and-contrast situation.
Hearing that her friend was actually happy to not get anything back in taxes, the refund recipient asked why exactly that could be. Tu’s tax-savvy character said, “(Your refund) isn’t free money; it’s your money that you’re getting back late.”
Noting that this is akin to the federal government giving your money an interest-free loan, the smart tax preparer continued to say, “I get to keep my money in my pocket — and actually, I have it invested,” In the past year, her $1,500 yielded a 16% return on investment, ending up with about $1,750.
How to reduce your tax return
TU then offered the audience some practical advice on how to keep more money away from taxpayers, forgoing subsequent returns in favor of free cash flow that can be wisely invested.
In this case, that solution came in the form of IRS Form W-4, formally known as the Employee’s Withholding Certificate. Using this form, you can dial in the exact amount that should be withdrawn from your check.
There is one caveat, however, as Money Personality pointed out: Make sure you don’t reduce your withheld amount too much. No one wants to face the worst-case scenario of a huge tax bill next year.
For self-employed individuals or those with a more complex tax situation (or for W-4 filers who want expert guidance to avoid costly mistakes), it’s best to talk to a tax professional before adjusting your regular payment schedule and amount.