One of the worst things that you can do as a consumer is to end up in a bad enough situation where you feel compelled to take a payday loan. These are equivalent to a financial kiss of death because the prohibitive interest rate can make it impossible to pay back. There are ways where you can end up with extra cash to avoid having to take a payday loan. One way is to adjust your tax withholding from your paycheck.
The average tax refund in the United States approaches $3,000 each year. The amount can be even more if you have children or other dependents and receive a tax credit. Many people will look at this like getting a bonus every April. However, that cannot be further from the truth.
In reality, a tax refund is just the government giving you back money that was always yours. Uncle Sam is not giving you a bonus out of the kindness of his heart. Instead, he is giving you back the money to which you are legally entitled. You just simply paid too much to the government over the course of the prior tax year. You have effectively loaned your own money to the government which it is now repaying.
While you may like getting a tax refund because it is an unexpected positive surprise, the best outcome is for you not to be owed any money by the government at all in April. A tax refund is just giving you back tax money that you overpaid in the first place. Accordingly, the most positive scenario is never to overpay the taxes to the government in the first place.
With this in mind, one way to avoid having to take a payday loan is to keep your money and not overpay the government. The way to do this is to change your tax withholding to ensure that you do not pay more than you need to in taxes during the tax year.
The size of the average payday loan in the U.S. is $375. By the time that the lender finishes tacking on fees and interest to this amount, you could end up paying back close to $1,000. However, if you are like the average taxpayer, you end up paying close to this amount each month in extra taxes. If you had this in your account before April of the next year, you may not need to scramble for small loans when you have an unexpected expense like a car repair.
The key is that you need to plan out early in the tax year what you expect your tax liability to be for that year. You should sit down with a tax withholding calculator to figure out the exact amount of your income taxes based on your expected income for the year. From there, you can exert some control over what you pay in taxes. You do not just have to sit idly by and let the government take extra that they would eventually have to give back to you.
You control what you pay in taxes through the exemptions and withholdings on your W-4 form. This is what tells the IRS how much to take in tax from you. If you want to get your money upfront and not have to wait until April to get it back, you can review your W-4 to make sure that all of your dependents are reflected. The W-4 form also gives you the option to reduce your withholding for other deductions that you may have.
Of course, if you withhold too little from your earnings, you will end up owing the IRS money at tax time. You must try to withhold the right amount from your taxes. However, if you do make a mistake and underwithheld, it is better to owe the money to the IRS than a payday lender. The IRS will charge you a lower interest rate and is obligated by law to work with you to get your tax debt paid.
Many people overlook their tax refund until they end up filing their taxes the next year. If you find money tight, you should not let it get to the point where the IRS owes you money. Instead, through the W-4 form, you can make sure to get your full paycheck on time.