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January 30, 2011 at 11:08 pm #597789
beachdrivegirlParticipantRecently with friends we were discussing tax returns. The topic came up when one friend asked “What everyone was going to do with their tax return money?”
I was surprised to learn that I was the only one that tried to zero my taxes out each year. Meaning I would not get a return, but I would not pay either. My reasoning behind this is that I would rather have my money in my pocket working for me or paying bills today then to give the government a free loan.
I was shocked because a few of them were going to be using their tax returns (in a few cases) thousands of dollars to pay off credit card debt. I kept my mouth shut because they are my friends but all I could think is if you had got that money up front you wouldn’t have needed to accumulate the credit card debt and/or you could have paid it off earlier eliminating those pesky interest fees.
Am I missing something?
January 30, 2011 at 11:39 pm #715723
SmittyParticipantI think you are in the minority.
Personally, I withhold less than I should and end up owing money – and pay last minute.
I would rather have my money as long as possible as well.
January 30, 2011 at 11:54 pm #715724
SarahScootParticipantSemantics issue: a tax return is what one files; a tax refund is the money one receives from the IRS in the case of a surplus payment after the tax return has been filed. Moving on:
People who are fiscally savvy will absolutely try to neither owe taxes nor receive a refund after filing their returns. You are absolutely correct, BDG, that a person who receives a tax refund has basically given the government an interest-free loan with their money over the previous year. On the other side, if one does not have enough taxes withheld from each paycheck (or pay enough in estimated quarterly taxes, if self-employed), he will owe when it is time to file his return. If the amount owed is over a certain amount, the IRS can penalize the taxpayer. Basically, one can’t simply have nothing withheld all year and then pay all taxes in one lump sum, as this is akin to the government giving the taxpayer an interest-free loan.
Smitty likely has just enough withheld to not have to pay a penalty, but is able to earn a return on some extra funds before he pays those taxes. For example, if he made $40,000 and should be taxed 25%, he may choose to only have 24% withheld, and invest those other $400.00 for the year. Let’s say he earned a 20% return on that $400: when it comes time to file his taxes, he pays the remaining $400 owed to the IRS, but pockets $80. Sweet deal! He just has to make sure he’s not going to be subject to any penalties. :-)
The other side of the argument is that people who are not fiscally responsible and don’t put money into savings may wish to over-withhold from their paychecks; this “forces” them to save, but they are earning no interest on that money. For some people, it’s worth it to get this “unexpected” chunk of cash back. I understand the thrill, but I’d rather sock away my money throughout the year in an interest-bearing account.
January 31, 2011 at 12:09 am #715725
Genesee HillParticipantI have always liked the “forced savings”. I do realize that I am missing out on WHOPPING half of a per cent interest on my money. But I could care less. Even my wife, who is VERY fiscally prudent, is in agreement.
Interest free loan to the government? There are certainly worse places to loan money! Like Muckleshoot or Tulalip, for example….
January 31, 2011 at 12:26 am #715726
SarahScootParticipantWell, yes, Genesee Hill: my point was that if someone is so fiscally irresponsible that he will blow any extra money at Muckleshoot or Tulalip, he is definitely better leaving the excess in the hands of the IRS. However, someone with such limited discipline will probably be just as irresponsible with the large chunk he receives as his tax refund.
I am certainly able to earn more than 0.5% on my savings. I earn 1.1% on my ING Direct savings account, and much more on investment accounts. So yes, for those that will gamble their money away, they should let the government babysit it for them. For those of us who like to save for big goals and won’t blow our cash on slot machines, it’s much more prudent to put money into savings or investments.
January 31, 2011 at 12:44 am #715727
beachdrivegirlParticipantI am glad that I am not missing something. And yes SarahScoot I had meant tax refund. Sorry it is Sunday and I have had no coffee. My brain isn’t quite performing.
January 31, 2011 at 1:06 am #715728
Genesee HillParticipantYes, I understand both points of view. The gambling scenario was, more or less, tongue in cheek.
Bottom line for my wife, and me, is we PREFER to get a refund. Forced savings, even though we have no difficulty saving otherwise, or paying off the mortgage, or paying cash for our cars.
Yes, I realize I can get 1.1% interest on savings accounts. We do have CDs. We do have money in stocks. We have made money in the stock market, and have lost money in the stock market.
We like getting a refund. I can clearly see that many people do not, and I understand why. No argument here – just stating my preference!
January 31, 2011 at 1:10 am #715729
SarahScootParticipantGotcha, GH. :-) I understand the appeal of getting that check, and if we’re considering an over-/underpayment of my taxes, I’d prefer to get a refund than owe (but then I’d immediately go to my company’s payroll department to have my withholdings adjusted). Because yeah, that money likely wouldn’t have grown much in one year, anyway…
January 31, 2011 at 4:29 am #715730
skeeterParticipantKeep in mind some people get the earned income credit (EIC.) So their refund could exceed their tax withholding. Or they could have no withholding and still get a refund.
Also, people who work only a portion of the year often end up with large refunds. Withholding tables assume income is earned throughout the year, not just here and there.
In my experience, any refund over 10 or 15% of withholding is either the result of a period of unemployment or the EIC.
A small overwithholding of taxes is actually a pretty good forced savings plan for many Americans. Those with a 6+ month cushion in savings might not benefit, but folks who cannot/choose not to save anything during the year are well served by having the gov’t hold onto their money a few months.
But good for you, Beach. Sounds like you’re a saver! When your friends get their refunds, maybe they’ll buy you a round of drinks!!
January 31, 2011 at 6:47 am #715731
charlabobParticipantEven sadder, some people are forced to get usurious “loans” from tax preparation companies so they can get their refunds a couple of months (or weeks) early. They’re not all financially irresponsible — some are just plain desperate.
(I did tax prep counseling at a community center a few years ago and it pretty well disabused me of the idea that anyone who didn’t have a 401K was irresponsible.)
January 31, 2011 at 2:31 pm #715732
anonymeParticipantI don’t mean to hijack the thread, but thought this was a relevant FYI: I filed my taxes a week ago, only to get a notice that the federal government would not start processing claims this year until mid-February, with refunds going out end of February at the earliest.
January 31, 2011 at 9:13 pm #715733
beachdrivegirlParticipantI know Charlabob it kills me about those loans! They should honestly be illegal, imo.
January 31, 2011 at 9:45 pm #715734
charlabobParticipantHi BDG — (I assume we can’t threadjack, since you were the OP) :-) Attempts were made to regulate these, along with “Payday Loans” — at both the state and federal levels — they found out that usurious lenders have a very strong lobby. Actually convinced people that they would be denied their right (to be ripped off) if the regulations were tightened. Sometimes we (the people) surprise even me (the cynic).
January 31, 2011 at 10:37 pm #715735
beachdrivegirlParticipantWow- Charla. I honestly am speechless and that is tough to do for me. I know technically I shouldn’t worry about what others do with their money, but if it is looking out for their best interest (not getting ripped off) it is hard not too.
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