I’ve found that when I’ve tried to increase my exemptions to approximate the tax savings I get from deductions, I end up having to pay, which I can handle, but do not wish to experience.
In my case, the bit of cushion I allow in order not to owe generally ends up being a few hundred dollars. For the sake of illustration, let’s say I have a $1200 refund. If I had been investing $100/month and earned 10% (optimistic, probably), I’d be raking in $120. It’s really not a big deal to me; I’d rather be assured I won’t owe anything.
::shrugs:: I just don’t have enough of a hard-on for the taxman to mess with it.
Oh, that’s completely understandable, but why not lower your withholding as far as you can so your employer pays the smallest possible amount to the feds and you get the most money in your weekly paycheck?
This year I should be getting a pretty large refund.
I think it will go to refilling the emergency fund that I have been depleting since the end of October when I went on short term disability from work without pay.
At least the medical insurance continuted to be covered.
Normally I get a very small refund but having the income drop to 0 for just over 2 months will make a big difference in it.
In the past when married with children we were in the areas of getting EIC and other large credits. We did not apply for advanced EIC payment but didn’t pay any other taxes throughout the year either. I know we could have applied for them but getting that one lump sum payment of an amount that seemed have the rules changed each year was just safer for us at that time.
Tax refunds are always a return of money you earned because you gave more to the government than was needed to cover your tax bill. They don’t hand out extra, unearned money to the poor.
I’m with you on the middle class part but not the rest. You can always adjust your withholdings to account for any tax credits. For over a decade now, I have told them exactly how much to take out of my paycheck.
I freely admit that savings is not a strong point with me, so I make sure that I overpay lest I get hit with a tax bill that I cannot afford for some reason.
Besides, I’m doing my part to retire the debt. Yeah, that’s it…
It seems like you guys have some fundamental misunderstandings on how income taxes work as I did when I got out of college and had my first full time real job. There are a lot of books out there and it’s not that difficult. Even, maybe especially, with a lower income, you need to make your money work for you. For example, if you have consumer debt and your paying interest on it all year, you’re way better off not waiting for a big refund.
No, I’m pretty clear about how it works. I’m simply willing to lose a little throughout the year and be sure than get trapped at the end of the year. Still, you do have a point. The interest itself could probably get me some nice accessories for my collection.
Obviously, having the IRS over-withhold is not the optimal savings strategy. But given the extra money every month or two weeks, most people would neither save it nor spend it on anything memorable. Thus, for many people, it is actually rational to have the IRS overwithhold; that way, you get a chunk of money you can save or spend to treat yourself.
Actually, that’s the way that I looked at it for many years. Not long after I got married I realized that the only way that we could accrue any big amount of money was to let Uncle Sam do it for us. Otherwise it just seemed to evaporate. Despite knowing that it wasn’t the best approach, I knew that it was at least practical. And it seemed the path of least resistance rather than working out a budget together, knowing that there would be endless discussions over every purchase in order to stay within our budget.
Now that I’m single and answerable only to myself, I’ve put myself on my own financial plan. I pared my withholding down as far as I dare, knowing that I will have to come up with some money in April.
In all honesty, though, I should say that over-withholding saved my ass one year. I was in tech stocks a bit in 1999 (you probably see where this is going), and made some money which I then stupidly reinvested in other tech stocks without holding some out for taxes. When the market tanked right before April in 2000, I found that I owed money on my 1999 return, irrespective of how much I had later lost in 2000. Thanks to the over-withholding it didn’t hurt as much as it could have and I was able to pay the bill.
Not true. It is a refundable credit, meaning you get money even if you have zero tax liability. It is “free money.” It can be sizable too, a couple thousand with two children in a certain income range. The Additional Child Tax credit is another refundable credit, and usually appears if a low tax liability disallows one to take the regular Child Tax Credit.
Actually, you do not need to wait until you file to get the EITC. There is something called the Advance EITC which you can apply for based on estimated EITC. IIRC you arrange it with your employer, although most employers don’t know much about it and are hesitant to support it. I think I’ve only seen someone use it once when preparing taxes, it comes up very rarely, and most people are willing to wait or don’t want to pay it back if their situation changes halfway through the year. Still, it is a way to avoid the “tax free loan” to the government that entails a refund.
Use of the word “refund” is misleading as strictly you can only be refunded something you have already paid. Nevertheless, it is clear that the EIC can exceed the amount of tax paid or owed.
