Debt management starts with paycheck management

The average American will see a tax refund of a little more than $2000 this year. A check for two thousand dollars is always welcome, especially in a country where the average household has nearly $10,000 in credit card debt. People plan months in advance how they will spend this “windfall” without realizing how much it costs them to receive this large check every year. The smart taxpayer knows that there is no benefit in receiving a large tax refund. We will explain why.

When you get paid, your employer takes a portion of your paycheck and sends it to the government to account for anticipated income taxes. At the end of the year, you prepare a return and the amount you owe is compared to the amount that you have had deducted from your paycheck. If you are short, you send more money. If you have paid too much, you get a refund. The system is set up so that the average taxpayer is likely to pay more than he or she owes.

But if you are regularly receiving a large tax refund, it also means that you have been lending money, interest-free, to the government for the last year. A $2000 refund also means that you have been giving the government nearly $170 each and every month for no reason. Could you use an extra $170 per month? Most people could find far better use for that $170 than to lend it to the government. One good use, for example, would be to apply it to that credit card debt.

All you have to do to adjust the amount of taxes that are withheld from your paycheck is to fill out a new W-4 form with your employer. This is the form that you fill out when you start a new job, and it outlines your marital status and how many dependents you have. When you get married or add another child to your family, you should adjust the withholding accordingly, but most people either forget to do so or forget that it can be done. Over time, and after a few children, you can easily end up lending the government far more than $170 per month.

The ideal tax refund is exactly $0, and that is what you should strive to attain. At the Website of the Internal Revenue Service you can find a tax withholding calculator that will help you appropriately calculate your withholding taxes. No one wants to owe money at tax time, but it is a far smarter use of your cash to pay no more in taxes than you absolutely must. No one is going to lend you money for a year with no interest, so why should you grant the government a year long, tax free loan? That $170 per month that you are overpaying is your money. If you adjust your withholding taxes correctly, you will be able to keep it and use it to reduce your debt.

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