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 using a simple tax calc.
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?
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This article was selected for the 404th edition of the Carnival of Personal Finance hosted by financial coach Adam Hagerman.