Monday, February 18, 2008

My theory of tax refunds

When it comes to finances, I'm an idiot savant--without the savant part.

But... I think that we've figured out a good way to handle our tax withholdings and, by extension, our tax refund.

I claim few exemptions, so the state withholds more money for taxes than it needs to. As a result, we get a nice tax refund each year. I know that conventional wisdom says not to do this because why give the government the interest? Well, savings accounts pay so little interest these days, that i don't know if that's helpful.

I like doing it this way for two reasons. 1) It keeps pressure on us during the year to live with what I am paid each month, and our spending would increase if I brought home more. 2) We spend the tax refund differently, and I think better, than we would the same money paid out with each paycheck. We're more likely to pay off debt or make a well-thought out purchase with the lump sum of the refund as opposed to getting the money each paycheck.

If nothing else, the refund gets me into the tax accounts office early in the tax season.


Jason Kinney said...

For some reason I thought we were the only ones with this dilemma. But obviously we are human also, Janine and I.

Same thing; should we change our withholding and get more each paycheck or should we continue with this HUGE refund at the end of the year.

What we did was both. I took our withholding and changed it so HALF of our refund is coming back in our paycheck and this I have dedicated solely to giving.

The other half of the HUGE refund will be used for debt or in the case of this year to fix our falling bathroom. Oh, and for an iPhone too. . . ;-) and it will still get us into the accountants office early.

Thanks for the opportunity to share this with you. Someone in a similar situation.

Ben said...

We always used the tax-refund savings plan too. It's interesting here how many house helpers opt to take home only a fraction of their salary each month, so can get a much bigger lump sum at some future date and buy something significant.

Brad Wright said...

I'm glad to hear that the system works for other people... I just figured that I was doing some nonsense thing.