Tax Returns

Ah...spring is in the air, the birds are chirping, the flowers are blooming and of course people are pulling out what hair they have left trying to get their taxes done.  Nothing like the last minute procrastinators rushing to the post office to send off their tax returns.  I know my quotes this week are more funny and sarcastic than thoughtful but I couldn't resist because it's true.  Taxes really are the bane of most people's existence.  The tax laws in this country get more convoluted every year trying to squeeze more and more out of the working people.  But this post isn't about the injustice of the current tax system, it's about the tax return.


This time of year is either the most dreaded or the most loved depending on how much the government decided to take or give to you.  If you are among the hard working, self-employed, then I feel your pain.  For you, there's not much you can do for this except vote!  This post is  addressed to those if you who are not in that group and have a regular job with w-2's.  You know who you are.  When you started work, you filled out a W-4 that tells your employer how much to take out of your paycheck and give to the government in taxes.  This form is vague and many people don't know what number of exemptions to put down.  The number that's right for you varies depending on your situation.  Quite often the guidelines on the form to figure the exemptions come out too low.  This is especially true if you are a one income household and have children.  


The bottom line is this: if you are over withholding your taxes simply to 'save money' and get a large refund STOP!  As I said in the tip of the week, this is probably the one area that I have never heard disagreement in the world of financial advice.  Here's what usually happens when you get your big fat tax return.  You try to act responsibly and put some into savings or pay down the last of the Christmas bills or other debt that has accumulated throughout the year.  But more often than not, the money just burns a hole in our pockets and we end up buying some big thing or going on a fabulous vacation.  Either way, the money is gone and you still aren't any better off. 


The most common excuses for this practice are 'I can't save money otherwise' and 'we use the money to pay down debt, so that's good'.  Let's start with this business of not being able to save money.  If you do what I'm telling you to do you will have more money coming home every paycheck.  If you still don't trust yourself, then set up a savings account and have the money that would come home sent directly into the savings account.  Out of sight out of mind.  If nothing else, at the end of the year you would have your own 'tax return' and the interest accrued on top of that.  If you want to make even more on that money than just simple interest in a savings account try this: use that extra money every month to go toward your debt.  The interest you would save far outweighs the savings account interest.  This is my preferred method but doesn't just happen automatically.  It requires you to take an even bigger step and become intentional with your money.  If you don't have a plan for that extra money, it will get blown on whatever looks good that week.  


If you are using the money to pay down debt, then try this on for size.  Try using the extra money every month to pay down debt or at the very least, to avoid the need for the debt in the first place.  You'll see progress throughout the year and build confidence in your ability to take control of your money.  Yet another reason to have a plan every month for your money (aka a budget).  If you are still having trouble swallowing this advice, I would ask you to think about it and try it out for a year.  You can always go back to loaning the government money if you don't like it.