By Daily Mail (U.S.) | Created at 2025-01-31 19:56:43 | Updated at 2025-01-31 22:50:00
3 hours ago
Americans should be worried if they receive a tax refund which is over $1,000, a tax expert has warned.
That is because it could be a sign that they are paying out too much of their paycheck toward taxes, said accredited financial counselor and accountant Jasmine Johnson.
While receiving a large tax refund every year might feel like a bonus, it is money that could have gone to better use throughout the year.
Especially as inflation remains elevated and many people are living paycheck-to-paycheck, it is crucial to stay on top of your tax withholdings, she told CNET.
Tax season has now officially started, and Americans have until April 15 to file their return with the Internal Revenue Service (IRS).
The good news, according to Johnson, is that taxpayers can adjust how much they are paying at any time by updating their tax withholding on their employer's W-4 form.
'If it's been over five years since you last updated your W-4, there's a chance you could be overpaying,' she told CNET.
'This is especially true if you've had life events that could affect your taxes overall, such as kids, marriage or divorce.'
Americans should be worried if they receive a tax refund which is over $1,000, a tax expert has warned
'If it's been over five years since you last updated your W-4, there's a chance you could be overpaying,' said accredited financial counselor and accountant Jasmine Johnson
The amount Americans have received in rebates has been rising year-over-year, according to IRS data.
Last year, the average refund was $3,138.
With every paycheck, employers withhold some of workers' earnings for taxes such as Social Security and Medicare, and the amount depends on how much employees earn.
Johnson suggests Americans should review their W-4, or Employee's Withholding Certificates, and update it if they would like more in their take-home pay.
For example, if they are currently claiming '0' exemptions on their W-4, claiming '1' will reduce the amount of money withheld for taxes, so they will see more in their paycheck each month.
That extra money could then be spent, invested, or put into retirement savings so that it can grow in value.
Johnson points out, however, that changing tax exemptions may not make sense for everyone, and some people may be concerned about paying the government too little and owing money in taxes each year.
She recommends Americans use an estimated tax tool, such as the IRS tax withholding estimator, to help them calculate how much they should pay throughout the year.
Johnson suggests Americans should review their W-4, or Employee's Withholding Certificates, and update it if they would like more in their take-home pay
Monday officially marked the beginning of tax season in the US
Johnson's advice echoes that of CPA Rebecca Chen, who said that Americans need to 'change our mentality about tax refunds and remind ourselves that it is our money to begin with.'
She warned last tax season about how having too much withholding with the government is essentially like giving them 'an interest-free loan' throughout the year.
She added that this is especially important in a high-interest and high-debt environment.
While benchmark borrowing costs set by the Federal Reserve have come down from the 22-year highs seen in 2024, they still remain elevated between 4.25 percent and 4.5 percent.
For people who are seeing their credit card balances go up and are seeing high-consuming debt, Chen said, it does not necessarily make sense to withhold with the government while paying such high interest.
'Lower your withholding and use that money to pay off your high interest rate credit card debts and you'll be better off financially,' she said, or invest in a high-yield savings account.
If an average refund of $3,000 was placed in a high-yield account with 5 percent interest, this would make $150 throughout the year.
