I don’t know about you, fellow Savers, but I’ve been waist-deep in tax returns for the past week and haven’t felt much like writing about finances outside of that.
I used to love doing taxes and would even volunteer to do my friends’ taxes, years ago. That, of course, was when mine (and theirs) were relatively simple. No one itemized deductions or had investments or kids. That’s all changed. And ever since I had to throw international rental income into the mix, I’ve hated doing taxes. Oh, and did I mention that I do a SECOND set of taxes every year, in the fall? UK taxes for my husband for said international income. I’ve been doing those taxes for over 5 years and I’m STILL not sure I’m doing them right.
As for my U.S. taxes, I had an accountant do them for two years. This year I decided to do them myself to save a few hundred bucks, but it was a scary undertaking with all the new things in play in our financial life. And whatever I couldn’t get e-filed for free, I did manually to save even more money. That added a layer of pressure. So yeah, I don’t see them as the fun choose-your-own-adventure game that I did when I was a feckless youth.
Another reason I used to love doing taxes was to see what kind of refund I got. It was like winning the lottery! Free money! A bonus out of nowhere! I’d blow it on something exciting and that would be that until the next year.
That was until I created a budget. And started thinking about paying off my debt. And started thinking about my future.
Then, I read in a few places that the refund you get after filing your tax return is just the government paying back an interest-free loan that you let them borrow. They got to play with money that was rightfully mine, and they didn’t pay me anything to keep it.
Meanwhile, I was carrying credit card debt with interest rates as high as 21%! I certainly wasn’t getting an interest-free loan from anyone.
Once I made that connection, I started tinkering with withholdings, so that I got a little more money in my paychecks but virtually no refund the next year.
Sure, you have to be careful you don’t go too far and owe a ton, because both the federal and state governments will impose a penalty if you owe more than a certain amount. And no, I don’t get that visceral thrill of coming to the end of the TaxACT questionnaire and seeing my refund add up.
I was actually reminded how cool that can feel this year. We got quite a bit back because of credits we qualified for with our new baby. I enjoyed the frisson of delight while telling my family how much we were getting. Then I decided to put the entire amount toward student loan debt. Then I set about using the IRS calculator to figure out how to adjust our withholdings so that this year, we get a little bit of that money each month, and can start putting it toward debt right away.
It’s one of the financial matters I feel pretty strongly about. If you use your refund to pay off a big chunk of interest-bearing debt, you should just adjust withholdings and pay down that debt each month. You’ll save a few bucks in interest.
If you use the refund to go on an indulgent vacation, you should adjust withholdings and use that extra money in your account to start a savings account just for vacations. Whether you earn a small amount of interest (going rates at online banks are only about 1% right now) or sign up for a bonus (many banks will give you one if you set up direct deposit into savings and keep the account open for a certain amount of months), either way you’re getting SOME extra money to put toward that vacation that you wouldn’t have if you’d let Uncle Sam borrow it for a year.
If you struggle to put 10% of your income toward retirement savings, adjust your withholding and set up an automatic debit into an IRA, or up your 401(k) contributions. (That would even ease your tax burden a bit for the next year, since 401(k)s reduce your taxable income.)
A lot of otherwise pretty savvy financial people I know stil go for that big refund; they just can’t let go of that thrill. But for me, if I got another refund of thousands of dollars next year after learning what we’re entitled to this year, I’d just feel like sucker, letting my old burnout pal Sam sleep on my sofa for a year without paying rent.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net