Tax filing season is upon on shortly. The IRS is almost prepared to receive your Federal Income Tax return for 2019, and by the end of February you can expect to receive a refund check from the IRS if you indeed are owed one. Before you make plans to spend it on the latest must-have item (be that video game, cell phone, or clothes), let’s talk…
First of all, let me be clear. In this post I am going to talk about both what do you do if you owe money to the IRS, and what to do with your refund if you are lucky enough to get one. You might want to think about it this way: the best solution would be to owe nothing and to have no refund owed you.
If you carefully plan your withholding from your pay check, you would not be overpaying the Federal government every time you get paid (and therefore be owed a refund), and you would not be underpaying the Federal government (therefore owing money to the IRS). The amount you withhold from your paycheck is based on your W-4, and now is the time to check for 2020 (before too many paychecks go by) to see if your withholding is right for this year. You can do this at the IRS withholding estimator.
If you do owe money after filing your Federal Tax Return for 2019, it is time to review your W-4 form and perhaps choose to withhold a little more money. This way you are not hit with a bill at the end of the cycle for money which you should have withheld anyway.
If you are receiving a large refund, you might also want to review your withholding. You should look to see if you can adjust your W-4 so that you actually receive your money earlier in the year. If you get a refund, it is kind of like giving the government a loan for free since you should have had this money earlier; the Feds have been able to hold on to your money all year, and they paid you no interest on that money.
Regardless of the size of your refund I would suggest one particular choice for you for your refund check — don’t spend it frivolously! This is the time to take a look at your emergency spending and perhaps make a plan to start a savings account.
Most financial advisors will suggest that you should have an emergency fund which would allow you to cover 3 to 6 months of expenses if for some reason you lost all of your income. Now I know that it is unlikely that you will have enough to cover all of this as a current college student, and frankly most adults don’t have this kind of savings available, setting ANYTHING aside for emergency savings is a great idea.
Why do you need emergency savings? Remember that the best financial plan can be derailed by a simple urgent matter — a flat tire, an illness, a car breakdown, an unexpected reduction in hours, a parent who needs help. You may be asked to spend money you simply don’t have and the worst solution is to borrow money (like with a credit card or a payday lender) in an urgent situation. By having some savings, whatever you can afford, you guarantee that you can get through that urgent situation.
What a perfect way to start your emergency savings — with your IRS tax refund. Don’t spend it on luxuries. It’s not a lucky break, or a gift, or money you shouldn’t have already had in your budget. Make sure to save it! That’s the best plan!
Questions? Suggestions? Type away! Comments welcome.