Smart Taxpayers Get No Refunds
I heard a crazy commercial recently that sounded like a high-pressure advertisement to sell cars. It was loud, promoted the chance to win thousands of dollars and plugged the company’s ability to get you the refund you deserve. I did a double take when I realized it was actually a commercial for a tax return preparation service.
I understand that filing your annual tax return is about as much fun as pulling teeth. However, promoting a lottery-type scenario by giving away $32 million, $1,000 per day to 1,000 clients, seems over the top to attract customers.
Getting a refund certainly feels better than paying, but take a moment to consider what you are doing. If you are getting a refund, you essentially have given the federal (and possibly state) government an interest-free loan. Why do that when your hard-earned money could be working all year for you?
I’ve heard several taxpayers say recently that they intentionally try to overpay during the year as a forced savings mechanism. They’re concerned that if the money sits in an accessible account, they may spend it foolishly. They also feel like they hit the jackpot when they get their refund check.
Can you think of a better use for that money? What about paying off credit card debt, or other debt, and reducing the interest you are paying? How about saving more for retirement by upping your contributions to your 401(k) account, or even just saving in general?
If you are carrying credit card debt, you may be paying interest of 15 percent or more on that balance. If you have a balance of $5,000, that would increase your cost by $750 or more each year. If you can make larger payments on the balance every month, your costs will go down and you will get that debt paid off quicker.
If you take that extra tax withholding and contribute to a 401(k), that money will be invested for retirement sooner, and on a regular basis. It will be working for you, not sitting with the government. Additionally, the amount you contribute to a 401(k) will usually reduce your taxable income, and thus your overall tax liability.
Income tax withholding from your paycheck can be reduced if you are getting refunds. Estimate what you think you will owe for the year and then adjust your W-4 with your payroll department. Based on what you have paid in so far this year, figure out how much should be withheld from each paycheck for the rest of 2016 and adjust your W-4 accordingly. If your income changes throughout the year, you can make further adjustments then.
If you make quarterly estimated payments, these are usually based on tax liability from your prior year’s income. Do some planning during the current year and adjust those quarterly payments as needed. You do want to follow the guidelines so you are not underpaying and assessed a penalty.
Finally, there is no crime in paying taxes when you file your tax return. If you know you will owe come April 15, put that money in an account where it can benefit you. This is a much better way to go than loaning it interest-free to Uncle Sam. The smart taxpayer doesn’t try to get a refund.
This commentary originally appeared February 6 on TheCasperStarTribune.com
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