Most people get excited at the thought of a potentially huge tax refund, often to the point that they make costly, if common, mistakes with their cash.
Almost everyone is guilty of making plans for how to use that extra money. But what happens if you spend beyond your means?
My friend, Jason (not his real name), had big plans for his anticipated tax refund. When he finally had that money in his bank account, he was going to pay off his credit card balance.
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You see, he had recently treated himself to a brand new 80-inch television. When he bought it, he didn’t have the money to cover it. But it was on sale, and he figured a smart shopper would jump on that deal.
So he put it on his credit card and said that he’d pay it all off once he got what was supposed to be a hefty refund check.
A Common Tax Mistake
Tax time came, and Jason crunched the numbers. Then, assuming there must be a mistake, he crunched them again — and again, and again, and again. Finally, he made an appointment with an accountant to find out what was going on.
It turned out he had completely overestimated the amount he’d get back from the government. He had anticipated receiving a lump sum of around $3,000 — after all, the average American’s tax refund is right around there, about $2,546 in 2020 and $2,815 in 2020, according to the Internal Revenue Service. Unfortunately for Jason, he ended up with a measly $200 refund.
This proved to be a huge problem, as he no longer had a way to pay off his credit card bill fast enough without incurring interest — worse it was too late to return the television he bought. He was stuck searching his couch cushions over the next few months, scraping together the money to make ends meet and pay for something that he shouldn’t have bought in the first place.
Common Money Mistakes
I know what you’re thinking. You’d never do something as boneheaded as that. But chances are, you’ve fallen into this very same trap at least once or twice, even if not quite on that scale.
There’s one critical money mistake that far too many people make — counting on money that they don’t have.
Your checking account is fine, you tell yourself, because you have a birthday check from your grandparents on the way. Or maybe you go ahead and overspend just a little bit because you remember that a friend still owes you money for concert tickets that you bought.
Either way, you made the same blunder that Jason fell victim to: You counted money that wasn’t in your wallet or bank account yet.
Banking on Inheritance Money
Gifts and IOUs aside, this can also happen on a larger scale. Many people count on receiving a large inheritance when a loved one passes away.
This expectation is far more common among younger people, which can be particularly dangerous, since they’re just beginning to learn how to successfully manage their own finances. About 39 percent of American adults expect their relatives to leave them money or valuables, according to a Merrill Edge survey.
Americans who inherited funds in 2019 received an average of $46,200 in inheritance, according to the Federal Reserve, a far cry from the average expected inheritance of $72,200.
Across the board, it seems most people in the United States overestimate the cash they think is on the way.
To complicate matters further, between inheritance taxes and, in some cases, pricey family disputes that an inheritance inspires, many people don’t end up receiving what they thought they would.
Other Common Errors
Besides miscalculating your refund, here are a few other common tax mistakes that catch wage earners unexpectedly come tax season. Certified public accountant Bret Scholl outlines a few other common errors to be mindful of ahead of the April 18th tax deadline:
- Not reporting your part-time job earnings: “Tax tables assume that your salary from your main job is your only earnings, and therefore withhold at a tax bracket lower than your actual rate.”
- Changing employers mid-year: “Believe it or not we often see differences in how withholding is calculated depending on the payroll software or service the employer is using,” Scholl says. “Even a small difference of only $20 per paycheck adds up to over $1,000 over the course of a year for a weekly earner.”
- Your employer makes a mistake: “We see this more than a few times each tax season where the employer simply entered the incorrect Form W-4 withholding information and under withheld taxes,” Scholl adds. As such, it’s good to double-check that your employer has done their due diligence as it relates to your earnings.
The Bottom Line
So if there’s one important thing to remember, it’s this: No money is guaranteed unless it’s already in your bank account. Not your tax refund, not your birthday check, and not your inheritance.
Sure, a relative may leave a sizable inheritance or send you a check when your birthday rolls around, but don’t count on it. When it comes to your finances, only count the money that’s a sure thing. That is to say, the money that you already have in the bank.
Additional background information for this article was provided by Bret Scholl, CPA, of Scholl & Company.
