My Preferred Tax Return Amount: $0
April 13, 2009 by Miranda Marquit
Filed under Finance
It may seem counter-intuitive to say that you want a $0 tax return. But that is my goal. What a tax refund indicates is that you have paid more in taxes than you needed to. It means that you have given the government an interest-free loan. Tax refund money is money that you could have been investing. Or at the very least putting in a high yielding savings account. Tax refund money is capital that could have been used to earn a return. Instead, you are just getting back what was already yours — with no additional benefit.
I know that some folks like to use a tax refund as a sort of savings plan. It pays off debt and may added to the savings account after the fact. This actually does one a disservice. It promotes poor financial planning habits and prevents you from maximizing your income. While I suppose it’s better than having no savings plan, it doesn’t encourage a mind set that leads to truly yielding wealth.
- If you use your tax refund to pay off debt, it means that you have been paying high interest for a good portion of the year. Meanwhile, the money that was already yours was earning nothing for you in government coffers. You’re better off paying your credit card balances every month and avoiding a build-up of debt.
- If you want an automatic savings plan, have your money directly withdrawn from your checking account every month. Make sure you set up your personal finance software so that you don’t think that you have that savings plan money to spend.
You can adjust your withholdings to more accurately reflect what you owe in taxes. If you work for someone else, this is usually a matter of visiting the HR department and filling out a new W-4 form. If you pay estimated taxes quarterly, you get a new estimate every year.
I ended up with a tax refund this year
This year, unfortunately, I actually got a tax refund. We bought a home in late 2007, so 2008 was the first year that we had a whole year’s worth of mortgage interest for a deduction. However, the hope is that with my latest estimated quarterly taxes I will be back to paying a little extra in taxes.
The last few years, I’ve owed money. As my home writing business has grown, my estimated tax calculations have not been adequate. However, I have normally accounted for that and made sure that I set aside a little extra to cover the difference. It’s not much of a difference, but I just accept that I’ll be off by somewhere between $200 and $800 each year. And that’s not a bad thing; it means my business income is growing. :)
What about you? Do you like a tax return of $0?
image source: arborlaw.biz
Enjoyed this post a lot and decided to use your “reblog” button to discuss this on my blog also:
http://www.peakpersonalfinance.com/tax-refund-questions/
Great post!
Regards,
Rob
I always try to bring mine in within a hundred dollars one way or the other. That’s about all I’m willing to “lend” interest-free.
But, also like you, my writing business grew a lot last year, and I didn’t estimate quite high enough. But, as you pointed out, having your business grow is a good thing.
Tax refunds are like a savings account that pays you zero % interest minus the rate of inflation.
Great article. I actually prefer to owe the government some money as long is it is less than $1000 and I have paid atleast the amount of taxes I paid last year (so that I do not owe any penalties).
If getting a refund implies you are lending money to the government interest free, owing a small tax payment implies that you took a loan from the government with no interest.
I always expect, and look forward to, getting a refund. Why?
http://guzzothecontrarian.com/2009/02/08/income-tax-issues/
Nicely explained… hits the nail on the head! And arohan brings up a good point:)…
I am on the fence on this one. I have always gotten a refund, though I forget about taxes until around tax season, I always end up using the money for something worthwhile or important that was already planned but with money from savings so the tax return is welcomed. On the other hand I do believe there are better things to do with money than giving the government a loan interest free.
But I have a child, and another in the way. I have changed my tax withholdings but because of the huge child tax credit and my schooling tax credits I seem to always end up with a nice return. So I can go either way, we dont depend on the tax money but its welcomed.
Of course we’d love to get our withholdings perfect =)
One thing is the penalty for messing up is larger in one direction (witholding too little)
But I think that might be a fun game to play this year for me =D
Zero is the magic number. Getting there can be tricky, especially for us combo freelance/real job families!
Thanks! I love the whole reblog thing :)
Great point! I think it’s important to remember that if you aren’t earning any interest on your money, you’re LOSING because inflation is there, eroding the value of your dollar.
The hassles are exactly why I go for close to $0. If you owe more than $1,000, the IRS can hit you with penalties.
For the most part, if you underpay by less than $1,000, you are in good shape. And, yes, it is a rather fun game ;)