On behalf of the government I’d like to thank you for your generous taxes.
Thank you for paying too much in taxes every paycheck. We love the interest free loan! We’re trillions in debt and every bit helps. When we borrow from other countries by selling Treasuries we have to offer them interest for the loan. Can you imagine what the interest on trillions in loans comes out to?!? But by not adjusting your W-4’s you help to keep the United States afloat, if only a little bit.
Look, I know we’re in a recession and times are tough.
It’s scary out there! Unemployment is hovering around 10%. We would hate to have to cut more government jobs or programs so we all love that you extend a free loan to us. We understand you could use that money every paycheck. Even an extra $20 can help with groceries. Or it could even be used to build up an emergency fund, especially in these trying times. But you choose to give the money to us instead where we can do what we want with it then give it back to you sometime next year in one lump sum.
Hey, we love that lump sum.
Know why? Most of you will go out and spend it in one big bang. Maybe you’ll get that vacation or upgrade your furniture? Perhaps you’ll be paying off credit card charges from the holidays (oh, thanks from the credit card companies for that one). We love it because you’re helping to prop up the economy with your spending! Seriously! Don’t go adjusting your W-4. We have a lot of things to take care of here and we can use the extra dough.
In all seriousness though, why do so many people covet that big tax refund?
Yes, the extra money feels good to get but you could be doing so much with it over the course of the year instead of in one large amount. When I’ve tried to mention to some people that they could have more money in their paycheck they automatically tune me out and insist on the big refund.
What really gets me is how many people NEED that large refund.
You depend on it to get by. For some it will make or break your finances. This is evidence on so many levels that you need to get a handle on your money.
How many times have you looked at your paycheck stub and cursed the taxes that were taken out?
I know I have. It’s shocking to see how much more you could have been making without taxes. So why add to that?!?
The IRS has information on calculating what you should withhold on your W-4 form and it continues to their withholding calculator.
You should be receiving your W-2 (what you made at work) and your 1099 (what you made on investments and such) forms soon. Take the information and use it to complete the withholding calculator to give you an idea of what should be withheld. Use the results to complete a new W-4 form so you can pay the proper amount of taxes rather than overpay. When in doubt ask a tax professional.
Stop giving the government a free loan. It’s your money; you should have it in your paycheck!
Kyle C. says
It is hard sometimes to balance out the W4, especially when things change during the year. It also complicates things when you have both parents in a household working so you end up with two W4’s.
There is no reason anyone should count on a tax return, and I agree that you really shouldn’t have one at all. Let’s face it though most people aren’t going to save/invest the difference even if they do correct their W4.
.-= Kyle C.´s last blog ..Can you Build a Credit History Without Getting a Credit Card =-.
It’s true there are situation that can make figuring out your withholding difficult, but I think for most, their salaries and situations are stable year to year yet they still would rather have the big refund.
I think there is some sort of middle gray area where the refund is good. Its forced savings that you can’t budget for (con: no interet, but lets get real my ing is basically like having no interest any way after taxes).
You are right, if you are getting back $5K then sure something needs to be fixed but if you are getting back $1k to $2K then its a great forced savings mechanism. Even if it is to be spent on something big, then that person had more or less used a monthly contribution system to save up for that item.
.-= Evan´s last blog ..Is there Anything More Important than Money when it comes to a Job? =-.
Even $1000 comes to about $83/month. That’s the cable bill and more for most.
But maybe they didn’t have cable because they couldn’t afford it? And now they have a $1,000 check and didn’t have cable all year…they could prepay cable.
I just think it is a great forced saving mechanism as long as it isn’t taken to an extreme.
I’m thinking more of the person that has cable and is struggling to make ends meet but would rather have a big check than be able to get by better every month.
It can be a nice forced savings but if you want to force savings then do it. Automate a transfer into an online savings account every month.
I’m with you! After all, if you need that refund to get by, you would probably get by better with it in your regular budget. But, I guess psychologically, it feels like you are getting windfall of “found” money. Unfortunately, that’s all that feeling is — psychology. The reality is that money is already yours. You earned it. It’s not “found” or “free” at all.
Show me an average person that doesn’t “need” it in some way or another. I’ll take the money off their hands! Heck, I’ll even help them save. Give me the monthly cash and I’ll give it back to you in 14 months or so.
I do put extra money towards my taxes throughout the year, but that is to balance out my investments so I don’t end up paying. I have never understood the need for a huge tax return as I would rather have the money during the year!
Financial Samurai says
Getting a refund is a great benefit for most Americans, because most Americans can’t save.
Average refund is $2,400. 1% on the $1,200 (avg balance of the yr if you saved $200/month) is $12 BUCKS. Worth missing out on $12 bucks of interest, and more like $9 after taxes to allow the gov’t to save you from yourself.
Ok, fair enough on the 1%. But what’s the average credit card balance for families? And what is the average interest rate on those cards? How much better would their balances be if they had extra money every month to help pay off their credit cards?
what is the average savings rate of a Family? What are the odds that they are going to use it to pay down debt or save?
Financial Samurai says
Sure, but if we play that game of what the opportunity costs are, then it is endless. I just assume that nobody is silly enough to let credit card companies take advantage of them with a high interest rate balance! That’s irrational! 🙂
And of course we are all rational! 😉
correct!.. credit cards company get richer with our debts,. We become n% poorer with the interest we’re paying.
Daddy Paul says
The best tax refund is under $100. I do not want to give Uncle Sam interest free money for a year. I give them enough already!
I wouldn’t begrudge paying my taxes quite so much if the government was as frugal with themselves as I have to be.
I don’t see the President or his good wife having to repair their clothes because they can’t afford to replace them!
Agreed but lets face it, tax makes the world go round!
Although I can appreciate the author’s perspective, I totally disagree with his oppinion. Here’s why:
I am both an employee AND a business owner. I make a comfortable living at my J.O.B. And I sell real estate as well. Since I never know how much money I will make selling homes – I never know what my tax brack will be. Therefore I have the equivalent of the highest tax braket amount witheld from my paycheck, and put the highest possible amount from my comission in a special savings account, set aside exclusively for my taxes.
I actually knoe someone who didn’t have enough witheld and ended up owing $2,000 (scary). To make matters worse, he was already living paycheck-to-paycheck, had little savings and had to beg the IRS to workout a payment plan with him. That is not a place that I for one, EVER want to be. I’ll give the IRS their interest free loan for less than a year in exvhange for a good sleep every night, if nothing else 🙂
Glen Craig says
As a business owner, are you paying estimated taxes? I would think that would help the uncertainty of knowing what your end of the year taxes would be?
As for the person you know, I think there are greater things at play here than letting the IRS hold your money. This is a great example of why it’s important to have emergency savings, and savings in general, in place. Also why it’s imperative to move away from living paycheck-to-paycheck as soon as you can. It doesn’t take much to get deep into money trouble when you are paycheck-to-paycheck.
I think someone who is living by the seat of their pants financially needs the extra income in every check more than they need the IRS to hold it as a lump-sum savings for sometime next year.