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Tax Time. Should You Aim for a Refund?

{ Posted on Apr 12 2010 by Marcus Alston }

It’s that time of year again. Tax time.  Time to either do your taxes yourself or have them done.  Every year at this time, most people are either getting a refund or owe money.  The way my wife and I have set up our exemptions and our budget (coupled with charitable contributions of money, goods and other deductions), we end up getting a refund each year of a few thousand dollars.  There are basically 2 schools of thought about refunds:

1.    Don’t get a refund.  When you get a refund, it means you overpaid your taxes and let the Internal Revenue Service (IRS) use your money interest free.  Instead, increase your exemptions to increase your take home pay during the year and lower your eventual refund.

2.       Do get a refund.  Getting a refund is a great way to force yourself to save and you don’t have to worry about paying the IRS at tax time.  Don’t worry that you lost out on interest, because by letting Uncle Sam hold the money for you, you lived below your means and paid yourself first, albeit into a non-interest bearing account.  If you get a $3,000 refund, assuming you could have gained interest on that same $3,000 for a year at 8%, you lost $240 or $20 per month.  Losing out on the interest may be worth the forced savings, however.  Most people do not have the discipline to save the extra $3,000 in the first place.  Instead, they spend it.  Another benefit of this method is that if you file late, you will not have to pay a penalty because penalties are calculated on the amount due.  Since there is no amount due, there is no interest penalty.  In fact, if you have a refund, the IRS may pay you interest on the delayed refund.

I have tried both methods.  I hate owing money in general, especially when the amount is somewhat unpredictable and due in a hurry.  This is why I like and use option 2 (the “Refund Method”) — I like getting money back and living below my means.  I know I lose out on interest, but for me it’s worth it.  When I talk to my friends who owe at tax time, they always lament their situation and are usually envious of the fact that I am getting a refund.  I do remind them that they had use of their money throughout the year and that mine was with Uncle Sam gaining no interest, but it seems to offer little comfort to them at tax time.

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Copyright © 2010 by All rights reserved.

4 Responses to “Tax Time. Should You Aim for a Refund?”

  1. We owe this year and boy are we annoyed. Need more tax right offs.

  2. Sorry to hear that you owe this year, but at least that means you had use of all the money that was owed to you and then some. See if you can determine why you owe this year. Was it due to an increase in pay (a good thing), less deductions (not so good), or some other reason? If you can pinpoint the reason, maybe you can plan accordingly or make adjustments. You might also consider having more money taken out of your pay check by reducing your exemptions. If you have an accountant or financial advisor, this person should be able to help you further.

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