Why I Don’t Care About Trying to Minimize My Tax Return

Tax Return - 1040

(Photo credit: 401(K) 2013)

Taxes are due in just 3 days. The PF blogosphere has been a steady stream of tax advice for months. And probably the most common piece of advice: if you are receiving a tax refund this year, then you are a schmuck who is giving money away to the government. Instead, they say, you should try to make your tax return as close to zero as possible.

My advice? Ignore that. It’s really not worth it. That’s why I don’t care about trying to minimize my tax return. Call me a schmuck, but I believe my money is being put to a better use by not seeing it until I get a big income tax return.

Let’s say that you got a refund of $1040. If you got paid weekly, that means you had an extra $20 withheld from your paychecks that wasn’t necessary. In the words of most personal finance bloggers, you gave Uncle Same an interest-free loan of $20 each week for a year.

But let’s stop and think about that number for a minute. $20. What would you have done with that $20 if it had gone in your pocket? Paid down debt? Put it into a savings account? Invest it in your IRA? Those sound like some great options, but we’ll get to those in a minute.

Will you really put the extra money in your paycheck to better use than a no-interest loan that is a tax return?

Would you actually have done any of those things? Or would you have bought dinner one night that you wouldn’t have otherwise? Or gone shopping? There are a hundred things that are more likely to have happened to that twenty-dollar bill than putting that money to work for you. Twenty dollars you probably aren’t going to notice or spend wisely. But $1000+ in one lump sum is something that more people are going to sit down and think about how they are going to spend.

Paying off debt Before waiting for the tax return

So you want that $20 per week now to pay off debt? If it’s a credit card earning 19.99% interest, you will save yourself about $100 compared to using that tax return to pay off a big chunk at once. That’s pretty good. Assuming you actually do it.

Of course, if the rate on your debt is lower, you will save a lot less. The highest rate I have on my debt is my student loan at 5.75% Running the numbers, I could pay off an additional $28.49 with weekly payments versus one lump sum payment.

(Want to calculate it yourself? Download this payment calculator and input your own numbers of starting balance, interest rate, minimum payment, and the amount of your tax return)

Saving the extra money

Want to set that money aside in a savings account? Good luck finding one that pays more than .01% APR. That works out to a measly $1.09 for the year.

Investing it

How about saving for retirement, that sounds like a lofty goal. Of course, you can do that with your tax return. The added advantage of investing $1000 at once instead of $20 per week is that you will pay only one transaction fee. Those trading fees will eat a lot of your $20.

Maybe you were just going to put it into a no-load, no-transaction fee mutual fund. Those are how I do nearly all my investing. No fees to worry about there, but most of them are going to have a minimum buy-in. There are a lot more funds out there with an initial buy-in of $1000 or lower than there are $20 or lower. And many have minimums to buy additional shares of the fund.

But ignoring all that, how much extra money will investing weekly over once make you? Even at 7% returns you’re looking at a lousy $40 per year. When you retire, you are looking at around an extra $4000. That is 2 months worth of income…in today’s dollars. Adjusting for inflation using the historical average of 3.2%, that is just over $1500, or not quite what I spend in one month.

The important assumption

Of course, even attempting to minimize your tax return means one very important assumption: that you have a steady and reliable income. That means that you are a salaried employee. Minimal over-time. No short hours, no furloughs. No job changes, and no raises. Also, you don’t have any unusual self-employment income, or gambling winnings. To even plan what your tax bill is going to be to know how much is just enough to withhold, you are going to have to know how much income you are going to have made at the end of the year, at the beginning of the year.

Do you try to minimize your tax return? If so, do you actually spend the extra weekly money wisely?

This article was selected for the 404th edition of the Carnival of Personal Finance hosted by financial coach Adam Hagerman.

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34 thoughts on “Why I Don’t Care About Trying to Minimize My Tax Return

  1. We got a whopping $40 back from the Feds & $120 from our state. We do save or use the extra money each month for different things we’ve budgeted for and aren’t wasteful with it. The interest free loan is a moot issue these days since rates are non-existent. For me, I’d rather have our money working and doing things for me now as opposed to a year from now. For example, we use some of that money to put in our monthly vacation budget. We can now take a vacation when we want as opposed to waiting on money back from the Feds to do so.

    All that said, regardless of how much you get back, the issue for me is being wise with whatever choice you make. If “you” take that extra $20 and waste it on McD’s then you’re no better than taking the $1040 and throwing it at a big screen TV.
    John S @ Frugal Rules recently posted..Frugal Friday: Taking Aim at Cable CompaniesMy Profile

    • I’ve found that getting time off from work has been the bigger issue for vacations than funding. There’s usually enough money in the savings account to cover trip expenses.

  2. In today’s zero interest rate environment who cares if you loan it to the government for free. You probably would have just spent it if it was in your paycheck anyways….

    • That’s exactly my point. But most PF bloggers still complain about giving interest-free loans to the government. Is that really any different than the nearly zero interest loan to my bank in the form of my savings account?

  3. I don’t care so much about minimizing my tax return either.

    1) I don’t like surprises. I’d rather get money back than have to cut the government a big check. The latter option is far more disruptive to my life and finances than the former.

    2) I just think of tax refunds as a bonuses that will be deposited directly into my investment account.

  4. Anyone that wants to loan me the amount of their tax return for the year at 0% can email me. I’ll pay you back in April, I promise!

    Yes, people may spend that extra $20 per week on a dinner out or whatever. But the overwhelming majority of people take that $1000 in their tax return and go buy a new iPad or TV. Something they probably wouldn’t even consider if it was just an extra $20 per week.

    These days investing commissions and fees are basically not existent. Most brokers offer commission free etf’s nowdays. I can take that $80/mo and invest in vanguard index etf’s that have a .1% expense ratio.

    Even if its not much, money in your pocket is much better than kindly letting the gov’t hold on to it for you for 12 months.

    • So you can, in turn, loan that money to the bank for 0.1%?

      With their return, my parents got a replacement to their failing 20 year old refrigerator, 15 year old freezer, 10 year old washer and dryer, and 4 year old phones.
      As far as the “buy something big they wouldn’t otherwise consider” argument, the problem is that they DO consider it otherwise. Without the big return, they just put it on the credit card!

  5. I do my best to keep my refunds/taxed owed small, but I don’t obsess over it. But the points you make are the same arguments I have when the question comes up about investing or paying off debt. Everyone says that you should invest if the interest rate on your debt is lower than what you can expect to earn in the market. But how many people are really going to invest that money? Most won’t. They’ll intend to, but will forget or put it off and will not invest the money.

    Since most people choose not to budget, I say just take the refund but be certain you put that mney to good use.

  6. We have a different tax system in the UK than in Canada and I’m still trying to learn. This year I did our taxes by myself which was great because I learned how incredibly easy it was and wondered what took me so long to figure it out. We got a whopping $216 back and that will go right back into investments. I think everyone is different when it comes to taxes and returns and as long as they use the money wisely then who cares what others think.
    Canadian Budget Binder recently posted..PF Weekly Reading List #15- Bieber Wants To Help Your Kids “Get Money”My Profile

  7. I see your point and it is certainly valid Edward. Like your blog BTW! Anyway you could look at this way…Supposed you took that $20 per week and invested in a stock that appreciated or one that provided a dividend, you may be missing out on some gains. Most likely your return wouldn’t be huge, so I certainly see your point. I just hate having the govt, piss away any more of my dough than they already do!! Great post though!

    • The investment income was covered in the third post of the post. I figure that weekly stock purchases over annual would net me am extra mightn’t retirement income over 30 years.
      The government can’t waste your over-withholdings. They have to pay it back when you file.

  8. Schmuck here: we have no debt, so we forego, what 0.0001% interest by letting Uncle Sam use the money to bail out Wall Street fat cats until the refund is due.

    Not only is it nice to get a big chunk of money back once a year, but it’s also a great incentive to get our taxes done way before the rush. What a cool way to turn stress time to a payday!

    And the kid in me loves the surprise: how much will it be this year?

    Then again, nobody ever accused me of having an IQ much bigger than a snotty kid… :)
    William @ Bite the Bullet recently posted..You What? Gamble Every Day?My Profile

  9. I totally get what you are saying, but I think the government is so horribly inefficient these days that I don’t want to give them one penny for one day longer than I have to. I haven’t had a refund in years, but I would rather save my money in a.20% interest account than let Uncle Sam have it. I know people aren’t disciplined and count on refunds to pay off big bills or make home repairs or whatever needs done, and I think that is a great idea if you know you would have spent it elsewhere if it wasn’t in a lump sum.
    Kim@Eyesonthedollar recently posted..How Can You Still Have Student Loans at Age 40?My Profile

    • The thing is, for all the debt ceiling talk the U.S. government has never defaulted on it’s obligations. Your over-withholdings are as safe in the treasuryas they are in your local bank.

  10. It’s a situational thing. I believe that the majority of people would use the money to inflate their lifestyle. At least some people might use this money to pay down debt that otherwise would’ve been spent on lifestyle.
    Others will use the money to upgrade cars, furniture and other things. Either way, these people may use cash on some of these items (perhaps not the car) and in the end save money that would’ve went on credit.
    Justin recently posted..Our Long-term GoalsMy Profile

    • Yes, if we hadn’t gotten a refund we would have been forced to use the credit card to buy our washer and dryer. And since the place we went to only accepts cash payments, we would have wound up spending more.

  11. This issue really doesn’t arise in the UK because the tax system corrects itself automatically through the year. I see your point – $20 would not be noticed but then you could put it in a 401k or something like that. So yes, it isn’t much but no, it’s still better in your pocket than Uncle Sams!
    John@MoneyPrinciple recently posted..One thing you don’t know about me…My Profile

  12. I’m on the fence about the whole topic.

    When I see clients that are living paycheck to paycheck, paying the minimum on their cards and bouncing a check twice a month, my first inclination is to look at their tax return to see if they are getting a large refund. If they are, I point them to the IRS withholding calculator to help them adjust their W-4. Obviously the large refunds have not helped them in the past because they are still in debt (and actually accumulated more).

    Most of them like seeing the extra money in their paycheck to pay down debt. Now, like you said, you have to be extremely devoted to the cause for it to work out in your favor. It allows them to actually see some progress on a monthly basis vs. once per year. Motivation? You bet.

    Now if you are out of debt, I can get behind your point a little more. Having that extra money to invest in one lump sum? Awesome! There are some downfalls to that though. For one, you will be essentially timing the market around the beginning of each year. Is that the best time to buy? Who knows.

    By adjusting your withholding you can dollar cost average your investing over the entire year. Think you’d spend the money? Set it up to come out automatically each month and go to a transaction free mutual fund.

    I truly get what you are saying and I will finish with the tried and true “personal finance is just that – personal”. Do what the heck works best for you!

    • You do make a valid point about the beginning of the year not necessarily being the best time to buy things.

      I guess my big question would be, are those struggling paycheck-to-paycheck clients of yours receiving regular or irregular income? I’ve found the W-4 withholding system to be fundamentally flawed with respect to irregular income. It simply chokes on it. As far as I can tell, withholdings are calculated assuming that every paycheck will be the same size. Last year, I had 8 paychecks that had no tax withheld at all, because, if every week was like that, I wouldn’t have owed. But they were exceptions, not normal income.

  13. I’ve never really had a huge refund so I tend not to worry about it either. I’m much happier to get something back than to owe of course. :) Interest rates are so low these days that it doesn’t bother me that the IRS “made money” off of my refund during the year.

    • Over the past decade, I think I’ve averaged about a thousand dollar return each year. It’s pretty funny when you consider that during that time I’ve had an $8000 gross income and a $57,000 (joint) gross income!

  14. For a while the government held way too much of our money. With some great changes that shifted and the rewards were so much greater. I also don’t like what the government does with the money they have. Some services are great and others aren’t. It’s the lies that get me. When my money is tied in with them I feel the lies they weave sting more.

    • Well, my salary is paid (indirectly) from taxes, so I don’t mind them too much. :)

      Two things I’ve noticed about taxes in America. 1)They are miniscule compared to most other developed nations, so we probably come off as whining to people in counties like the UK (45%) or Denmark (59%!). 2)Our economy seems to have been doing a lot better when our tax rates are higher!

  15. Pingback: Carnival of Personal Finance #404 – It’s Tax Time! | Adam Hagerman, AFC® – Financial Coach

  16. This is the first I’ve seen this opinion shared in the financial blogosphere!
    I agree, getting a lump sum of that extra $20 a month really makes you sit down and think how you are going to spend it. You know those people that are putting away an extra $20 a paycheck? Sure, maybe they made 1% interest on it, but this is letting Uncle Sam force you to do so, and then you get a nice surprise return at the end of the year to put to work.

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