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Getting a Tax Refund is Silly

October 16th, 2007 at 01:52 pm

A friend of mine is getting a divorce and having trouble paying the bills. She mentioned that she should be getting about $6,000 from her tax refund this coming year, and is anxiously waiting for January to roll around so she can file. She said before the divorce she had normally used the money to buy antique furniture or go on trips with her husband. I asked her why she had any refund coming to her at all. She looked at me like she didn't get my question. I suggested she set up her W-4 withholdings so she didn't get any refund at all and perhaps even had to pay $100 or so in April so she could have use of her own money the whole year, instead of giving it to Uncle Sam to use, interest-free. She had honestly never thought of this. Wouldn't it be better for her to pay the right amount of taxes as she went throughout the year, rather than having too much taken out and not having it to earn interest or pay down debt (she's having to move out of her house because she's been so strapped all year). I have to ask why, since she has about $6,000 sitting where she can't get at it that she could really use RIGHT NOW. You can do a W-4 calculation on the IRS Web site to figure out if you have too much tax being withheld each paycheck.

11 Responses to “Getting a Tax Refund is Silly”

  1. denisentexas Says:

    I've said for years that refunds are simply interest free loans to Sam. He gets enough of my money without me letting him borrow it for free and if I have it I can earn interest so no thanks, refunds aren't for me. I don't think refunds make a lot of financial sense but there are a lot of people who really do like the system.

  2. disneysteve Says:

    You are absolutely right, and she can change it right now. Go to her job and change her witholding for the remainder of the year. She can probably have nothing witheld for the next 2 months and still end up with a refund, just a smaller one. Might help out with her current situation.

    Ideally, you should just pay the taxes you actually owe. It makes absolutely no sense to pay hundreds or thousands extra for no reason, just to get it back the following year.

  3. kinchan Says:

    To Disneysteve: Agreed. Well put.

  4. jennlem Says:

    In theory I whole heartedly agree. However, for me, I know that I will NOT save up the extra money in each check and then have a large sum at the end of the year. For me it works better to give Uncle Sam a interest free loan and have nice return. But that is me and that is how I operate--it is not necessarily good for everyone

  5. cptacek Says:

    If everyone in the country had to take out their check books on April 15 and send in a check, there would be a revolution. By taking it out every payday, it smooths the feathers of most workers who don't pay attention to how much they are actually paying.

    We tend to tell people to invest through their 401(k)s because they won't feel the effect as much. Paying taxes this same way has the same effect.

  6. kinchan Says:

    cptacek: commenting on your comments...yes, that's exactly why the 17th century French minister of finance, Jean Baptiste Colbert, said: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing."

    And because most W-2 workers don't pay attention to what's happening to them tax-wise, they have to work to age 65, and are pinning all their hopes on 401(k)s. Tax is a big piece of the puzzle, but no one wants to deal with. Fine...but you can NEVER expect to get in control financially unless you do, no matter what anybody tells you. It's a lie. You cannot taxes and ever truly get ahead...no matter what you've heard the experts tell you.

  7. kinchan Says:

    Jennlem says: However, for me, I know that I will NOT save up the extra money in each check and then have a large sum at the end of the year.

    I'm assuming Jennlem is implying that he/she will need to save up to pay their taxes. If that's the case, no...you will pay the right amount as you go. You won't need a lot of money on April 15 to pay your taxes. If he/she means that they won't be disciplined enough to use the money wisely throughout the year herself/himself, then what does that say about being able to manage anything related to money? If people can't do that, then how can they be sophisticated enough to handle a credit card without getting in big trouble or a mortgage, for that matter. If we can't even manage a few extra dollars every paycheck that we save by not giving it to Uncle Sam unnecessarily, then should we really be charging shoes at the mall?

  8. baselle Says:

    I aim for a $0 return. Sometimes I get it, sometimes I get some $s, sometimes I pay some $s. No biggie writing that check.

    I understand the impulse of getting the big refund - it does force you to file because it will be good news, but think about this strategy - change the withholding, figure out the increase in each paycheck, then have it direct deposited as soon as the paycheck comes in. Its easy to set it up in ING, and even at "only" 4.3%, $6000 is $258/yr more.

  9. disneysteve Says:

    jennlem - The person in the OP is in financial difficulty right now. What good is it to her to know she has $6,000 coming back to her 5 months from now? If, instead of paying extra taxes, she was paying the proper amount, she would have an extra $500/month that she could use toward her living expenses, debts, whatever and perhaps she wouldn't find herself in her current situation and wouldn't have to move out of her home. I'd guess that $500/month would do a lot of good now rather than later.

    I'm not saying you need to save that extra money each paycheck. You (general you) may actually need that money to live on.

  10. Kikee Says:

    I could have and have written what Jennlem did.

    And it has NOTHING to do with having to save money to pay my taxes in April! @@

    I know that if I were to receive an extra $20 a week, I would piss it away in a heartbeat. The fact that I shouldn't is irrelevant. I WILL!

    Therefore, I prefer to get a $1000 tax refund which is immediately delegated to savings, a bill that has popped up, etc. I cannot, have not nor will I EVER piss away a lum sum of $1000.

    I am assuming that is more to what Jennlem was saying.

  11. jennlem Says:

    Kikee-
    Yep, that is exactly what I was getting at.
    Everyone--
    I didn't intend to suggest my alternative to the OP I was just mearly stating what I do.
    And also--blowing $20/month/paycheck/whatever and not saving it has nothing to do with not being able to pay a mortgage or other bills

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