Feb 18, 2016 Don’t Roll Your Tax Refund Forward
Getting a refund this tax year? You might be planning to use this money like a bonus: buying things you need or want or even putting it into an investment account. However, many Americans choose to apply their refund to next year’s taxes. At first glance, it might seem like a sensible idea – prepaying your taxes just in case – but letting the government keep your money another year has drawbacks you should consider:
#1 – You’re essentially giving the government an interest free loan. If you took that refund and put it in the bank you would earn interest but the government won’t give you anything to hold your money. Even at the current rates, getting something is better than nothing.
#2 – The money could get lost. Let’s face it – the IRS processes millions of refunds and returns every year and mistakes can happen. Often refunds that are rolled forward don’t show up the following year. Then you have the tedious task of gathering your return information and waiting patiently for the IRS to fix their mistake.
#3 – No taking it back. Once you fork over your refund to the IRS and April 15th passes, there’s no going back if an emergency occurs. Stashing that money in an emergency fund could prevent you needing to take out a loan if the car breaks down or you have a large medical bill.
Sometimes applying your refund can make sense. If you’re self-employed and make quarterly estimated payments, you could apply your refund to your next quarterly payment and avoid underpayment penalties. If this situation doesn’t apply, however, it’s probably better to take your refund now and pay down debt, save in an investment account, or put it away for a rainy day. If you do decide to roll your refund forward, make sure to keep accurate records just in case the worst happens.
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Market Update: February 2023