WHY Your Tax Refund is Costing You Money!

Hey everyone, welcome back to We're Talking Money. I'm Phil Clark, and for many of us, getting a tax refund can feel like sort of an annual tradition. We look forward to it; it's almost like a mini bonus. What if I told you that tweaking your tax withholding could put more money in your pocket throughout the year?

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Instead of waiting for that tax refund, you could use the cash now to invest or save, or maybe even just enjoy life a little more, maybe a little more breathing room when it comes to your budget. A big tax refund, it basically means that you've been loaning money to the federal government for free. You let them use your money for a full year and you get absolutely nothing in return. When you add inflation, your tax refund, it's actually worth less when you get it than the amount that was withheld. If you just simply adjust your tax withholding, you can have more take-home pay and use that money where it benefits you the most, not the federal government.

It all comes down to something called the IRS Form W-4. Now, this form tells your employer how much to withhold from your paycheck as it relates to your taxes. If you want more control over your money, updating your W-4 can help you get closer to breaking even when it comes to tax time.

Here's a quick rundown on how you can fill out this form. So first, it's your personal information. It's pretty straightforward, actually: name, Social, tax filing status, just a few things there. Number two, multiple jobs, or if your spouse works. If this applies to you, there's different ways to calculate the right withholding. The IRS even has a tax withholding estimator that can be a pretty big help when it comes to making that decision. And number three, if there are dependents and tax credits. So if you qualify for credits like the child tax credit, adding those details can help keep more money in every paycheck.

And number four, other adjustments. Things like fine-tuning your withholding even further starts right here. This section allows you to adjust based on extra income or deductions, or if you want additional tax withheld, this is the section where you would do that. Number five, it's sign and submit. Pretty simple. Once you're done with all of these adjustments or changes, you hand it over to your employer. They'll take care of the rest.

If you're new to adjusting your income using this W-4, don't feel like you have to do it all at once. In fact, you could start by lowering your refund a little, see how that works out. Just be careful in one area: do not under-withhold too much, because you don't want to get a surprise tax bill or penalties when it comes to April 15th.

So let's say adjusting your W-4 puts an extra $150 a month in your paycheck. What could you do with it? I'm going to give you three options. The first one is simple: it's just building an emergency fund. Having a safety net, that can be a game changer, and even small contributions, they can add up over time. Now, there's no tax benefit to this one, but it will give you peace of mind when you know you've got a nice little war chest in the event of an emergency.

Number two, it's the HSA. Most people know this is a health savings account, but not everyone understands how powerful this tool is. If you have a high-deductible health plan, an HSA, it offers some major tax advantages: pre-tax dollars going in, and it can grow like a retirement account because you get to control how you invest those dollars. If you stay healthy and you don't use the money, that is a nice extra nest egg that's building for your use, and it never goes away like some of the other savings plans.

The third one, and the most powerful: using your 401(k). And if your employer offers a match, that is free money no matter how you look at it. If you were to save $150 per month, that means $1,800 per year goes into your 401(k). With your employer's match, plus the tax savings and some growth, you would have potential earnings of $1,939. That's a total potential benefit of $2,269 in just one year, and all it took was avoiding the tax refund and redistributing that money in a much more powerful way.

Taking control of your tax withholding can put money back in your pocket. Best of all, it puts you in charge of your money. So if you're unsure about how to adjust your W-4, talking to a tax pro, now that can help you make the best decision for your situation, and everyone's is a little different.

Now, if this video helped you out today, don't forget to like and subscribe. We appreciate it so much. And also, let me hear from you in the comments section below. Do you usually get a big tax refund, or do you try to keep your withholding just right? I'd love to hear how you do it. Let's talk about it. Thanks for watching, and I'll see you next time on We're Talking Money.