No, YOU’RE doing your taxes wrong!
I won’t claim I’m a tax professional at all. I barely get by on doing my taxes properly using TurboTax as they’ve gotten much more difficult in the last few years since owning my sites, increased income at work, bonuses, etc. But I do know one thing, but I’ll get to that.
My wife was having a conversation with a friend and coworker about taxes. She was saying how we were having difficulty this year because we had to wait for a corrected W-2 from my employer and will probably owe a couple thousand dollars. In fact, we’ve owed thousands every year for the last 4-5 years. Sound wrong? It’s not!
Her friend expects a refund every year and always has plans for it. How many of you also do this? I did it for years. Everyone in my family does it. Many of my friends expect a refund. I bet most of you do too. She actually told us we were doing our taxes wrong because we owed money instead of getting a refund!
BUT YOU’RE ALL WRONG!
The answer is simple. When you get a refund, that means you’ve given the government a free loan. You think they would do the same for you? You might enjoy getting hundreds or thousands in the mail each year and plan your family vacation or some other big expense around it, but you’re forgetting one thing: the money was already yours!
If you would just plan appropriately at the beginning of each year based on last year’s results, and earnings and deduction expectations for the coming year, you could result in breaking even. However, I always make sure I have more than enough in savings to cover what I’ll owe. If you want to figure out how to fill out your W-4, use the IRS Withholding Calculator, but also consult an accountant in complex situations.
I’m in the same boat that I’ve had to pay money at tax time due to income from my websites. It sucks paying that big chunk all at once, but at least I’m not lending money to the government for free.
Well, here’s the deal (BTW, I **am** a tax professional, but that doesn’t make what I say any more or less true). Yes, you are giving the government a free loan if you are owed a refund. But unless you can find a way to get more than about 1% interest on your money, it may be better to go ahead and do that.
Some of us do indeed have investments that pay more than 1% (or whatever the going rate is at this time; I don’t know how much that is, but I DO know the “going rate” isn’t much). But for the vast majority of people who would have trouble coming up with the money to pay at the end of the year (and depending on how much they owe and what estimated payments they did – or didn’t – make, there also could be penalties involved), it might be preferable to forfeit this tiny bit of interest to keep from having to FIND the money in April.
In short: if you’re a great planner and don’t mind being sure you don’t owe “too much,” then by all means, go ahead and hold out to the end of the year. But if, like many people, you ask “WHAT taxes???” it might be better to go ahead and over-withhold, because you just won’t be giving up all that much **in this economic climate**. When interest rates go up, though….time to plan more carefully.
haha, actually there IS NO RIGHT ANSWER bro. What’s “right’ is whatever way works best for you. that’s why they call it personal finance – cuz we all have our own preferences.
I’d much rather get a refund every year than get close to breaking even – it’s a nice feeling (to me). Most people who spread it out over the year don’t even do anything smart with this extra money, so why not get a chunk back at the end of it means they can enjoy it and possibly even save *more* of their own money in the end?
Either way you look at it though, you can’t say one side is right cuz that’s only YOUR opinion. Everyone has their own ways of workin’ it.
@J$, actually, I think there is a RIGHT way of doing it, and that is NOT giving the government a free loan. If 1) you’re irresponsible enough as it is to not manage your finances well to save the money, then you’re doing something WRONG and 2) if you want to play head games with yourself, then doing it with your finances is a risky way to do it.
I do agree with part of what gharkness said above that some people just can’t handle the financial burden of a big tax hit, but again, if you care enough, you would learn up front what you’re in for that year, plan for it and continue to alter your plan as the year goes. The first time I was hit with owing $2000 to the feds, I was shocked, but luckily I had enough in savings and didn’t resort to using my credit card (and getting charged the exorbitant fee plus all the interest if I didn’t pay it off).
J$, I know you like to play head games with your money, but again, that’s probably not the way to treat finances because it’s real life, not a game. Learn to control your spending (which you have, I know, but speaking to the masses here) and saving and plan accordingly so you don’t rely on a refund…because it might not always be there!
I agree with J$ here. There is no right way of doing it. I am good with my money. However if I decreased my witholdings to get more money each paycheck, I am likely to not put that towards debt everytime. On the other hand, all of our refunds always go towards our debt, and seeing that big chunk come off in April is awesome.
This will probably change after we become debt-free. I will try to get the withholdings close enough to not have a refund. Everybody has a preference, and most of the time, there is no right or wrong way.
The only thing that I see wrong with it is having the money “spent” before you even get it. It’s one thing to have plans for the money but to spend it and hope its there is just wrong. You never know what might have happened with the tax law that changes your refund to you owing money.
You’re still calling an *opinion* a *fact* here, bro – so you’re still incorrect. Whether you feel it’s smart or not is totally cool, that’s not the point (to YOU, getting this money back at the end of the year is the wrong decision, we all understand that) but for you to say MY decision is wrong, or any others that like doing it this way is just false. That’s like telling everyone it’s smart to buy a house or invest in XYZ stock because YOU think it’s smart. It may in the end prove beneficial to the majority of the people, but it’s never black and white like that.
@J$, I don’t believe I said “fact” anywhere, except for “in fact” about our own situation. You, and a couple other commenters, are negating the single, basic FACT that you need to manage your money properly. I’m not going to jump from managing finances properly to “you need to own a home” or anything else because I know those are gray areas (both you and I would love to get out of our homes, I know).
I personally don’t care what you do with your money throughout the year, but when it comes to tax time, if you’re banking on a fat refund to pay off a debt, then that means you weren’t disciplined throughout the year to do it then AND THUS you’ve spent unnecessarily on interest. So, not only are you foregoing investment/interest money you “could” have earned (I know that you could have also invested and lost), but you most likely SPENT more money on interest on your debt…if that’s what you’re using your refund on. If it’s for a trip, be DISCIPLINED and save up for it throughout the year.
I’m pushing the disciplined approach, not trying to say anyone is a bad person for waiting for a refund. My own mother does her taxes this way.
I actually have to agree with CleverDude here. I’ve worked for many years to manage my withholdings so that at the end of the year, I come out very nearly even with the IRS.
It may be true that most people can’t manage to put money away in savings each month, but does that make failing to save the “right” thing to do? It seems that for many, the default “savings” plan is to have the IRS hold the money for them all year.
Granted, in a low interest rate environment you won’t make a lot of money on your savings, but it’s important to build the right habits in order to take advantage of high interest rates, when they eventually arrive.
The foolishness of having the government “save” money for you is compounded if you’re carrying high interest debt, on a credit card, rather than adjusting your withholdings and paying that debt off more swiftly.
I hate it when people act like their tax refund is some kind of gift or prize from the government — or, worse, an indication of the quality of their tax preparation method. I don’t think it’s necessarily wrong to overpay taxes, though. I always get a refund, but the interest I would earn on that amount is negligible, and there’s something to be said for avoiding unpleasant surprises (even if it means giving the government an interest-free loan). For people with credit card debt, however, it’s pretty stupid to lend money at 0% that they borrowed at 15%!
@Clever Dude — Well I guess we’ll just agree to disagree then. When someone says “it’s the wrong way” they’re labeling it a fact right there. And that’s my only argument here – not that one way is better than the other way, and I could care less how anyone manages their money as long as they’re happy and DOING something about it. I don’t even get a lump sum myself anymore (I file quarterly now, and actually owed money at the end of this last tax year), but I’m not going to tell someone their way of doing things is wrong.
I do enjoy a good debate though, so I def. give you respect for being passionate about things. That’s what I love about blogging – we all get to say whatever it is we want 😉
This is a good debate. I would like to have less withholding every month and use this paycheck money to save every month. Husband likes big tax refund check to pay for vacation, football tickets, and save some of it. It is not worth fighting about. We just do it his way cause he is happy. I find other ways to save every month. He understands that he shouldn’t give the government a loan and all that but HE likes the big check…
My husband and I also try to work it so that we are even each year – don’t get any money back and don’t have to pay in. It gets a little more complicated for us each year with stocks and my self-employment income in addition to both of us working full time. We actually got a bit of money back this year when we thought we would definitely be paying in.
But there really isn’t a “wrong” way to doing it, I think it comes down to personal preference for people.