Many taxpayers get refunds back from the IRS after they file their taxes, and that might include you. If you are, you’ll probably appreciate it. It’s nice to get that check and know that you’ve already paid your taxes on it and that it’s yours free and clear. Just so you know though, it’s probably smarter to plan on getting the smallest refund possible.
If you’re wondering why, one answer is that the government doesn’t pay you interest on your refund. All that money that comes out of your paycheck or your quarterly taxes goes and sits in a government account, and that means that you can’t park it in a savings account or another kind of investment. It might not be a lot of money, especially if your refund is only a couple of hundred dollars, but do you really want to leave that potential money on the table?
Another reason is that you might have put that in a tax deferred retirement plan or other kind of savings plan, which means that you not only might be earning on it, you might have been able to shave off a few more dollars in taxes as well.
Finally, refund money isn’t available until it’s actually received, which means that money due to be refunded might have been able to go toward bills that you needed to pay to avoid interest.
The best way of reducing your refund is to reduce your withholding or estimated tax payments, although you still should be paying what you paid the previous year or about 90% of what you are expecting for the current year. This is easiest to do if your income isn’t changing much between this year and the previous year, because you’ll know what to expect.
There is a form attached to the IRS Form W-4 on how to calculate withholdings from multiple jobs, but most people seem to prefer to work with their CPA or accountant to figure out what their withholding should be.