The Tax Deadline for 2018 is fast approaching, what to do with your refund, warning for next year.

The deadline for filing your 2017 tax return is April 17, 2018. That’s right all you procrastinators you get two extra days this year because the 15^th falls on a Sunday and the 16^th is a Holiday in Washington D.C.

Putting things off to the last moment is rarely rewarded in personal finances and can often cost you. When it comes to tax returns this is certainly true. Information is powerful and helps you with your planning so the sooner you know how much of refund you will get or how much money you owe the better. You can plan what to do with the money or how to pay the bill. You can also use the information to help you plan for next year’s taxes.

If you have a refund coming putting off your taxes just means you have let Uncle Sam collect interest on your money for that much longer. If you owe money you should still do your taxes early, but can wait to actually file them until the deadline. Some electronic filing systems actually let you file now but designate the date your payment will be made as long as you select a date prior to the actual due date. So you can file when you are done but delay the payment until the deadline.

Another hidden cost of waiting to do your taxes at the last minute is the cost of tax software. Several of the major companies significantly raise their rates near the end of tax filling season when people are desperate to get it done and not willing to shop around. Also if you need help doing your taxes, either through a paid preparer or online help, the closer you are to the deadline the harder it is to get timely help. I don’t really do taxes for many people but because of the number of people I help with personal finances I gets lots of questions from people doing their own taxes. This becomes a really busy time of year even for me. I am asked all sorts of questions about how to file taxes and the questions grow exponentially the closer we get to the deadline. This means I cannot always respond to everyone as quickly as they like when they need the help the most. So if you have not done your taxes yet don’t wait any longer.

If you have done your taxes congratulations. Let’s talk about that refund and planning for next year. People who get a large refund are always excited. But getting a large refund is not necessarily a good thing from a personal finance perspective. Any refund you get is your money, so it is not really “new money” it is simply a return of an interest free loan you made to the government for the past year.  If your refund is $5,000 it means you gave up an easy $75.00 in extra interest you could have earned over the year. When I ask people why they have such a large refund they tell me it is the only way they can save any money. If they lack the discipline save on a regular basis I would accept that as a good reason, but unfortunately most the people blow that refund as soon as they get it. So it was really just short term savings, on which they received no interest, which they end up blowing on something they do not really need. If you have a large refund and have the discipline to save on your own, adjust your withholding so you are not giving the government and interest free loan.

So what should you do with your refund? If you have met your savings goal for the year of at least 20% by paying yourself first you can do with the refund whatever you want. If you have not met your savings goal for the year you should apply as much of the refund as possible to the priorities for your financial plan.

You should also take this time to estimate next year’s final tax bill. As you probably heard there are significant changes in the tax law that will affect everyone. Most people will see a modest decline in their overall tax rate, though some will actually see an increase in their tax rate. For planning purposes weather your actual rate goes up or down is not as important and making sure you are having the correct amount withheld from your paycheck to avoid having too much withheld (interest free loan to government) or not enough withheld (possible penalties and/or a desperate situation when the bill comes due.)

Without going into all the details, the top rate you pay on your income only tells part of the story and bears little resemblance to your affective tax rate. It only means that’s the amount of money you pay on the last dollar you earned. A large portion of your income is not subject to any federal income tax. Under the old law you paid no federal income tax on the amount claimed for exemptions (yourself, your spouse, dependent children) or deductions (standard or itemized). Under the new law there are no longer any exemptions but the standard deduction has been increased. So this means people that have high itemized deductions may see the amount of income they have subject to taxes increase. If they had a lot exemptions (2 or more dependent children) that increase can be significant. For instance a married couple (that will still itemize their deductions) with three dependent children (not eligible for the child tax credits) will see there income subject to taxation increase by more than $20,000.00. If they are in the new 24% tax rate that means $4,400 more in taxes that may not be accounted for in the traditional tax withholding tables. So even if their top tax rate has gone down they may pay more in actual taxes, and more importantly if they don’t adjust their withholding accordingly they could find themselves with a big bill this time next year, along with possible penalties for under withholding.

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