While I love receiving a tax return, this year we will actually owe money to the Fed’s since my husband’s employer failed to take out enough taxes from his extra job checks. Luckily, we have enough money in savings to pay it off right away. Usually, in previous years, we would’ve received a hefty federal tax refund. I used to look at this as a good thing until I realized what most financially savvy people already know. There is no real benefit in getting a high tax return back at the end of the year. If you are getting a lot of money back at the end of the year, that means you are giving the government too much money from your paychecks!
I don’t know about you, but I rather get more money in my check on a monthly basis so that I can do what I WANT to do with it vs. giving it to the government. The more money I get on a monthly basis means the more I can use it to fund things in my budget NOW.
The increased cash flow allows me to do more with my money right away rather than waiting for the government to pay me back MY money. Now I know there is a school of thought that thinks getting money back at tax time is good because its feels like a huge windfall. Also, it seems that some people don’t trust themselves to use the money properly throughout the year and rather receive a big lump sum at the end of the year. Although, if you are a person that doesn’t trust yourself to spend money wisely on a monthly basis then wouldn’t it make receiving and spending a one-time lump sum even harder?
For example, if you get back $2,400 at the end of the year in taxes that means you overpaid the government by $2,400. It’s really just your money they are giving back to you, not money they magically just hand to you just because. That means you could have had an extra $200 a month to spend/save/invest how you choose versus waiting 12 months to use it.
Not only that, but you are giving the government a $2,400 interest free loan. They don’t give you interest back on the money that you overpay them, they just give you back what they owe you. On the other hand, if you owe the government money and fail to pay them right away, they charge you interest. Call me petty, but why should I give the government an interest free loan when they wouldn’t do the same for me. No thanks. I rather KEEP and RECEIVE my money right away than have the government hold on to it for me. I’m a big girl, I know what my goals are and I am disciplined enough to spend my cash wisely and I sure don’t need the government holding on to my money for safekeeping.
With that said, how do you figure out your tax withholdings so you can give the government exactly what you need to, nothing more and nothing less? Check out the withholdings calculator here which lets you calculate how much you should withhold in Federal Taxes. You can also play around with the free tax preparation tools online, (I use Turbo Tax), to see how much you would get back by adjusting different variables. I myself am still figuring out the magic withholdings number for my family so I don’t have it all figured out yet. What has become more clear is my mindset shift to becoming a more prudent and savvy investor of my money. Operation get close to 0 back in taxes next year has now begun!
P.S. The deadline to file your taxes this year is April 18th and this is the first year I am doing our taxes instead of hiring someone to do them. So far, doing our taxes has taught me a lot. I came across many mistakes or things we could’ve used to optimize our tax refunds in previous years that the paid professionals missed. While I wouldn’t recommend that everyone do their own taxes, you should at least understand everything being filed for on your behalf. No one is going to look out for your bottom line like you will, not even if you are paying them.