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Mommy, what’s a tax refund?

April 4, 2014 0 Comments
Child holding coins

Child holding coins

What would you tell your kids if they asked what a tax refund is? They hear people talking about tax refunds. Commercials explain how easy it is to get a refund quickly. Some companies even let you spend the money before the refund arrives. So let’s imagine a conversation between a parent and child about tax refunds. Here’s how it might go.

What’s a tax refund?

A tax refund is money that the government sends back to taxpayers like us.

Why?

Well, it’s because we paid too much money to the government during the year.

Why?

We filled out a form called a W-4 telling the government how much money to take out of our paychecks.

Can’t you change the amount on the form?

We can. But getting a tax refund give us extra money to spend now.

Does the government pay you interest on the extra money they keep during the year?

No.

If you didn’t let them take so much you would have more money every month, wouldn’t you?

Yes.

You could invest that money or put it in a savings account.

Yes.

Then why don’t you fix your W-4. Seems like a no brainer to me.

How to reduce your refund

Based on the average refund of around $2800 a simple change to your W-4  can put an additional $200 to $250 per month in your pocket. For information on how to change your withholding, talk to your payroll office, tax preparer, or follow the instructions on the IRS website. Withholding Calculator

The sooner you make a change the sooner you can start keeping more of your money. With that extra money you can you can start investing it in your retirement fund or other long-term savings program. Or you can pay more on your credit card balance or other loans.

By the time you get your refund on your 2013 taxes you’ve already handed over several hundred dollars  this tax year. Once again Uncle Sam will hold your money, interest free, until you ask him to give it back when you fill out the paperwork next year.

Money management is making the most of the money you have. Taxes are part of everyone’s financial situation. By taking control of your withholding now you will have more of your money working for you and your family.

Lynne Finch helps parents teach their kids about money from piggy banks to online banking. “It’s time to teach the kids how to manage money they can’t see or touch,” says the author of The No-Cash Allowance. Follow Lynne’s common sense approach for teaching children that money is a number with kids as young as pre-school and continuing through high school.