If I suggested that you take a couple of one-hundred-dollar bills and tear them up, you would probably think I was crazy. Especially at this time of year… who would do such a thing after Christmas, when money is already tight?? However, many people are throwing away money every year by not filing their tax returns on time, or not claiming the right number of exemptions on their payroll withholding. Every year I meet with many bankruptcy clients who tell me that they have not filed their tax returns for several years since they didn’t owe any taxes and would only receive a small refund. This is the same as tearing up a few one-hundred-dollar bills!
Are you surprised? Let me give you a better explanation of how this happens:
When you don’t file your tax returns on time, the IRS can access penalties against you. Those penalties could result in you losing the refund that is due to you (even if the refund is small). If your income is over a certain amount, you are required to file a tax return every year. Let me repeat: failure to file that tax return on time may result in the loss of the refund. While you can go back and file tax returns later if you do not file the tax return within 3 years of the due date you will lose any refund that you might have been entitled to. If you fail to file tax returns for several years, the IRS will file a substitute return for you and those always show that you owe taxes even if you might have been entitled to a refund. Bottom line is, file your tax returns on time each year and get those refunds! A little money is better than no money, or (worse yet) owing money.
Another way that individuals throw money away is by having too much withheld for taxes. If you are receiving refunds of over $1,000 (and the refund is not because of Earned Income Credit or Additional Child Tax Credit), you are overpaying your taxes. While it may feel nice to get that large refund every year, you are actually throwing money away. Wait, how does that work?
If you increase the number of exemptions that you claim on your W-4, you will receive a smaller refund when you file your taxes BUT you will receive more money in your paycheck. If you take that money and put it into some type of savings account, you will receive interest on the money. If you have a small number of exemptions and receive a big refund, the IRS is not going to pay you interest on the money you are overpaying them each year. You are missing out on the interest you could make by investing the extra money from your paycheck every month! It’s a simple case of delayed gratification versus instant gratification. The better option would be to avoid the big once-per-year refund in favor of a smaller refund and instead have that extra money spread out over your paychecks.
If you are concerned about your financial future, you should consider meeting with a bankruptcy attorney to discuss your options. The extra money you get in your paycheck every month might just be enough to cover a bankruptcy payment to get you on the path to a completely fresh start. You can contact us at any time online and we will get in touch with you on our next business day. Our phone line is always open during regular business hours if you prefer to call! 757-276-6555!