The 2018 tax overhaul brought a lot of changes to the tax code, and as such, many filers came into the 2019 tax season wondering whether they'd be getting refunds or owing the IRS money. And while it's too soon to tell how taxpayers fared on the whole, since the IRS still has countless refunds to process, as of April 5, the average taxpayer who received a refund got a $2,833 payout. This figure is certainly in line with the average refund from years past, and it's also not a small number.
Filers who wind up with a similarly sized refund will no doubt be celebrating the fact that they not only avoided owing money on their taxes, but actually have a small windfall to work with. At the same time, if you just received a large chunk of cash from the IRS, it pays to take steps to get more money throughout the year rather than wait until tax season to collect the cash that's rightfully yours.
A larger refund isn't actually a good thing
If you weren't expecting a tax refund this year, then a $2,833 payout, or anything in that vicinity, might seem like quite a fortuitous turn of financial events. But in reality, getting that much money in one single chunk isn't ideal, namely because you're getting it well after you actually earned it.
Many tax filers look at refunds as free money, but actually, it's your money that you worked for but allowed the IRS to hang onto during the year. If you're in a good place savings-wise, forgoing immediate access to that cash isn't the worst mistake to make. But if you don't have much in the way of savings, which is the case for most Americans, then giving up that money in your paychecks could damage your finances more than you'd imagine.
In fact, think about the debt you racked up over the past year. Would an extra $236 a month have prevented you from accumulating so much of it? If the answer is "yes," then you'll need to make sure you get more money up front in your paychecks from this point on, and you can do so by adjusting your W-4 withholding to claim additional allowances. The more you claim, the less tax your employer will withhold from your earnings month after month.
If you're worried that adjusting your withholding will result in a situation where you underpay your taxes and owe the IRS next year, a good solution is to take the extra money you get in your paychecks and put it in a dedicated savings account earmarked for emergencies only. If, come this time next year, you owe the IRS a bit of cash, you can dip into that account to pay your tax bill. Otherwise, you can keep that money on hand for unplanned expenses and avoid further debt in the process.
There's another thing you can do to avoid owing the IRS money next year after adjusting your withholding. Pay estimated quarterly taxes on any income you earn outside of your regular job, whether it's money you make by freelancing, or dividend or investment income you receive. Doing so will increase your chances of breaking even during tax season, and ideally, that's what you should be aiming to do.