Some people love their tax returns. They feel like they are getting a bunch of free money from the government. Unfortunately it’s not free money; it’s your money! And if you’re getting a big tax return, that means you’ve been missing out on your money for as much as 16 months.
This is especially harmful for people who are living paycheck to paycheck. I’ve known people who have been slammed with huge late fees and interest payments because they didn’t have enough money, and then they get a $3,000 refund check the next year.
If you’re getting a $3,000 refund, that means you could have had about $250 of extra income every month last year. Instead you let Uncle Sam hold onto it.
Your goal should be to get the smallest refund possible. That way you get to spend your money as soon as you make it instead of letting the government hold onto it.
Full Disclosure: I got a $1,000 refund this year, which was poor planning on my part. Last year I got an $84 refund; that was pretty awesome!
Here are the rest of the topics I’ll be covering today for Whatever Wednesday. If you want to be a part of next week’s post, make sure to follow me on twitter or facebook and tell me what to do.
Personal Finance Anagrams
I found a lot of personal finance anagrams, but none better than my buddy at Punch Debt in the Face.
Punch Debt in the Face = Enhanced Pubic Theft, Abduct Chief Pee Ninth, Cheapened Butt Finch, Debutante Chef Pinch
Other good anagrams of great personal finance sites include:
Thousandaire = Dinosaur Hate, Radiant House, Handout Raise
So Over Debt = Verbose Dot, Bored Votes, Sober Voted
Budgets Are Sexy = Grade Busty Exes, Bad Geyser Tuxes, Breasted Sex Guy
Wealth Informatics = A Rematch Foils Twin, A Flamenco Hit Wrist, Chairwoman Leftist, Reattach Wolf Minis
Money Reasons = Nosey Oarsmen, Erase My Noons, Moaners Yes No
College Basketball Predictions
Jeff asked me to talk about a mid major basketball program that is going to do well in the NCAA tournament. I don’t follow much college basketball aside from the Missouri Tigers, but I do have a prediction. The biggest mid-major win in the conference this year is going to be some mid-major team upsetting the Kansas Jayhawks. It happens almost every year.
2011: KU loses to Virginia Commonwealth
2010: KU loses to Northern Iowa
2006: KU loses to Bradley
2005: KU loses to Bucknell
As soon as the brackets are set, look for a mid-major team that will play KU in the 2nd or 3rd round and pick ’em. Oh, and pick Mizzou to win the national championship.
Spring Training
Joe wanted me to write about how the Detroit Tigers are going to win the World Series. I reminded him about the last time Detroit was in the World Series and how the St. Louis Cardinals beat the crapola out of them in 2006.
Speaking of World Series championships, I seem to remember St. Louis winning the World Series last year as well. I believe that gives them 11 World Series titles; the most in the National League and second most in the history of Major League Baseball. If you’re going to Vegas and want to place a bet on a team to win the World Series, I recommend St. Louis. Just remember that I’m a blind homer and really don’t know much about baseball.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT atย Buildingstars, Co-Founder of Padmission, and organizer ofย Laravel STL. He is also the creator of www.contributetoopensource.com. When heโs not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Haha, yeah – Punch Debt’s IS pretty good ๐ Not as good as my FREE tax money though!!! WOOO!! haha… yeah, it’s technically a free loan to the Gov’t, but much better to go down that route than the opposite in my opinion. If people enjoy getting a nice chunk every year, great! Hopefully it’ll excite them to do something smart with it too, unlike they would have done over the year.
For people like you and me who don’t necessarily need the money for day-to-day bills, I think a refund is fine. But for people who live paycheck to paycheck, they need all the money they can get as soon as they can get it.
Only if they actually USE it properly ๐ But yeah, overall a better idea…
What is interest nowadays?
Depends on where you put your money. Savings accounts are around 1%. P2P lending like at Lending Club can reasonably be over 10%. Right now I’m getting 14.24% in my lending club account.
The IRS Withholding Calculator can help you get reasonbly close to your actual tax exposure. Everyone should probably run the calculator a few times a year and adjust their dependant count based on the results.http://www.irs.gov/individuals/article/0,,id=96196,00.htmlIf you are paid a fixed flat salary it should be easy. However, you really need to stay on top of it if you have erratic income or side income or get paid overtime / commissions that your employer may choose to withold at a different rate than your base pay.
We just wrote about this yesterday! Thanks for reminding us that we want to keep our own money! Sounds obvious but so many of us still let the government hold our money for free. Crazy!
It just takes awareness. Once people realize they could have their money earlier then I think a lot of them do their best to get it ASAP. We just have to change the mindset of getting a big refund to getting as little back as possible.
User formatting error above! The link is:
IRS Withholding Calculator
http://www.irs.gov/individuals/article/0,,id=96196,00.html
I’ve used it and recommend it!
Thanks for the tip! If you have a simple situation, this is a great tool!
Very clever.
I had to read “Breasted Sex Guy” twice, lol. “Cheapened Butt Finch” – funny but I’m not touching that one!
As to your point, I totally agree with you, why let the government sit on money making giving them an invisible “free interest tax”, when instead people can be making use of that cash!
Who knew anagrams could be so fun?
I can second the withholding calculator – but it gives wacky results in the beginning of the year when you don’t have the full picture. It probably makes a bit more sense now, it being March and all…On the interest free loans, you got off easy this year considering you wouldn’t have made much in a savings account, haha. I had a monster return even after pumping my allowances – 2011 had a wedding and a home purchase, and that threw everything off, haha. Here’s to a better 2012!
There are lots of ways to make money that aren’t in a savings account. You also have to consider that some people are missing payments and paying late fees because they don’t have enough money at the end of the month.
I actually have a guest post over at Squirrler’s today where I argue that a tax refund is actually OK. With interest rates as low as they are, if you spend even $20 over the course of a year of money that you wouldn’t otherwise have until you got your refund, you could wipe out any ‘gain’ you’d have of preventing Uncle Sam from holding your money. If interest rates were to go back up, then I’d probably shift, but as it stands, I think getting a refund is just fine for most people.
A refund is potentially okay if you don’t have any debt and you’re just going to put that money in a savings account, but what if you are working on paying off credit cards or student loans? Or what if you are investing your extra money in something like Lending Club where you’re getting over 10%? Or worst case, what if you are paying late fees because you didn’t have the money to make a payment while Uncle Sam is holding onto $300 a month?
If your only option is a savings account then it’s not a big deal, but if you have other things to do with that money, then I think it is a big deal.
I agree. I think it’s a big deal no matter what. Would you deposit your money into a bank that pays no interest and is only open for withdrawals once a year? Hell no.
I’m referring to big refunds. If you’re getting thousands back, that means you did it wrong in 2011 and you should be running your 2012 data through the IRS calculator quarterly. .. Disclosure – I did it WAY wrong, so I’m trying to spread the message!
Yeah, I was excited when I got my tax refund — both my state and my country owed me money. You’re welcome, government. Hope you used that money wisely!
I feel pretty confident that the government didn’t use that money wisely. Well, some of it was probably used wisely, but definitely not all of it.
Punch debt in the face is also: The Best Website In The World….trust me it works. You’re funny man.
My drawing was going to be a Ninja trying to steal a pubic hair, but I realized I don’t have the Skitch skills to make that happen. Hence, you get Uncle Sam getting showered in dollar bills. ๐
But also consider: if you give most people an extra $25 a paycheck, they’ll just blow it on stuff. Yet if you give them $650 at once, they’ll probably use it more wisely.
I don’t feel like this argument make sense. What evidence is there that they would use the $650 wisely instead of just buying a new TV?
How can we assume that making a poor decision (letting the gov borrow your money for free) will lead to a good decision, but making a good decision (getting the extra $25) will lead to a poor one (wasting it on stuff)?
Personally, I wish that employers were not allowed to withhold income tax and that everyone would be required to file quarterly and send in a check to the IRS. If people had to actually ‘feel’ paying their taxes, maybe they would pay attention to who they elect to handle their money.
Probably impractical, but a guy can dream.
You can’t list every possible good or bad decision a taxpayer might make with their money. I’m just saying that small amounts don’t seem as significant as big ones–just like small withholdings every paycheck don’t hurt as much as writing a check quarterly. A large amount of “extra” money at once is going to make most peole think more about what they do with it than the $20 Grandma sent for Christmas. For some, the forced savings of overwithholding is the best/only way they’re able to save. So be it. For them, it IS a good decision. It’s painting with a little too broad a brush to declare a tax refund a Bad Decision.
Anyway, even if you did use it to buy a TV, paying cash is still better than putting it on a credit card.
@Jake: “Personally, I wish that employers were not allowed to withhold income tax and that everyone would be required to file quarterly and send in a check to the IRS. If people had to actually โfeelโ paying their taxes, maybe they would pay attention to who they elect to handle their money.”
Self-employed people with tax liabilities over $1000 and people who are otherwise underwithheld have to do exactly that. It’s called paying estimated quarterly taxes.
@Larry: I know and I love it, I just wish all of the W-2 workers had to do the same so we would all feel it.
I figured you knew. But most people think of taxes as only something to do by 4/15, and never think in terms of tax planning. Anyone can avoid surprises by just estimating their tax liability periodically through the year.
At least “Uncle” Sam is one “relative” who actually pays back the “loan”!
I always get a small refund from the federal but have to pay additional tax to New York. Same difference as far as I’m concerned.
I’m totally referring to this as the “Dinosaur Hate” blog from now on!! ๐