Big Tax Refunds or Breaking Even

By: Emil J. Belvin, CRTP, RCP

Have you ever had a co-worker or family member tell you what they got back for a tax refund and it was several thousand dollars more than what you received.  At that exact moment you thought to yourself, “How could they get back so much.”  When this happens, the thing to understand is that in order to get back several thousand dollars for a tax refund generally you must first put in several thousand dollars. A big tax refund is not left up to chance or coincidence; it’s left up to how much you pay into the system.  What you put in largely affects what you can get back.

What’s your tax strategy?

When it comes time for us to file our income taxes, we should be trying to achieve one of two tax strategies.  Either we are trying to get back a big tax refund or we are trying to break even.  Keep in mind, your tax strategy should be chosen in the year prior to filing your income taxes.  This is an important thing to remember because most of us only stop to think about our taxes when we file, but the year we’re filing for has already past.  Also, in order to see the best results when implementing your tax strategy you must stick with the plan for most if not all of the calendar year.  Having a strategy in place for only a few months may not give you the results you’re hoping.

Big tax refund vs Breaking Even

First, let’s look at what it means to get back a tax refund.  Generally, our tax refund is simply a return of the money we overpaid the government.  Yes, that’s correct.  Typically, in order to get a tax refund you must first overpay the government (put too much in the pot). The amount you overpay is considered your refund.  Secondly, let’s look at what it means to break even.  Breaking even is when you pay the government just enough money not to owe when you file your income taxes (put just enough in the pot).  THE BIGGEST DETERMINING FACTOR IN WHAT AND HOW MUCH GETS WITHHELD (PUT IN THE POT) IS THE NUMBER PLACED ON YOUR W-4 FORM.  THE HIGHER THE ALLOWANCES THE LESS TAX WITHHELD.  THE LOWER THE ALLOWANCES THE MORE TAX WITHHELD.

So with that in mind, let me ask you a question.  Would you rather receive a check for $250 per month for 12 month or would you prefer to get one check for $3,000 a year from today?  The above concept is quite similar when it comes to our tax refund.  “How?”, you may ask.  Well, would you rather have more money on your paychecks throughout the year or do you want to wait and get your money in a lump sum when you file your income tax return?

Most of the clients I work with would rather wait because they love getting back big tax refunds.  They look at their tax refund like a forced savings and feel they can do more with a lump sum than they could with smaller increments throughout the year.  However, a few clients see no need in letting the government hold on to their money.  They’d rather have their money upfront instead of waiting to file their income taxes.  So, by using this break even strategy they have more monthly income to invest or pay bills.  As a result, when it comes time for them to file their income tax returns their refunds are minimal.

Tie it all together

I’m often asked, “Is one tax strategy better than the other?”  There is no one size fits all when it comes to a tax strategy.  It is simply a matter of preference to the individual.  Each of us have different financial needs and that is what ultimately helps to determine which strategy will work best.

Your tax strategy may change from year to year because of changing financial needs.  Just because you’d like to get back a big tax refund this year doesn’t mean that you wouldn’t want to break even next year. Again, in order to see the best results when implementing your tax strategy you must stick with the plan for most if not all of the calendar year to see the best results.  Having a tax strategy in place will definitely help you feel more at ease when it comes time for you to file your income taxes.

Emil J. Belvin is the founder of EZXco., a Los Angeles-based tax service company, which specializes in taxes and financial services for healthcare professionals.  For more information on tax strategies for healthcare professionals, please call 310.670.3002 .


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