Yea! I got my income taxes done. Any day now I should be expecting both my Federal and State return to direct deposit into my bank account. I’m not getting back as much this year as I had hoped, but it will still be quite a handsome amount.
Just like back-to-school signs and Christmas decorations, you can almost pin-point the time from December on when a swarm of tax-filing hysteria starts to show up in our lives. But among the tax software and lists of documents we’re told to dig out of our file cabinets, financial advisors also like to argue one age-old debate:
• Should you wait to get your big tax refund check or take it throughout the year?
The difference of course is how many exemptions you file with your employer (if you don’t remember what you did, it’s in a little box on every one of your paycheck stubs). File a “0” and you will have more money taken out of your check which leads to a bigger end of the year return. File a “1” or higher and you will have less money taken out of your check, but your end of the year return will be much smaller.
So which side of the fence am I on? Well, I know I’m going to go against the grain, but here it comes:
• I prefer to file a “0”, have more taxes taken out, and get a larger tax refund.
Here are my reasons:
1. It really doesn’t make that big of a difference.
Let’s run some numbers using two extremes. Suppose you get a huge refund check every year, say $5,000. What would be the difference between pocketing the whole $5,000 all throughout the year ($192.31 for 26 pays) versus waiting until income tax season to get that big $5,000 refund check? At today’s 1% bank rates:
That’s right, about $23. Hardly seems worth the effort.
So what if you were an ultra disciplined saver and committed to putting that extra money away into an investment account (like your IRA or 401k) earning the historical average of 8% return?
$187 is a little better, but it still doesn’t break the bank. Plus, remember that this isn’t the same thing as “making an extra $187 each year” because you’re still going to get your big check at the end of the year. In other words, one is only behind the other by one year.
2. My income tax refund is my safety blanket.
I’m not perfect. Throughout the year, I budget and try to control my spending as much as possible. But things happen, opportunities come up, etc. It seems that by Christmas I always have to dip into my emergency funds to use money for less-than-emergency situations. That’s why when I get my income tax refund, it’s like a do-over or safety blanket. I can stash the entire sum away for the whole year and buffer my mistakes as move along. I know I “shouldn’t” need this, but it certainly helps.
3. You risk trouble.
It’s okay for the government to hold out on you for a year, but it’s not okay for you to hold out on the government. If you pay too little into your taxes throughout the year by claiming too many exemptions, you can be fined! So not only will you end up paying money back to the government, but now you have penalty charges on top of that. Why take the risk?
4. I learn to live on less.
Although this sounds like an insignificant reason, this is actually a very important one for me. By having more money taken out of my check each month, I learn to adapt my spending to a smaller paycheck. Basically it’s an “out of sight, out of mind” mentality. It is the same logic I use for having a high 401k contribution.
Learning to live on less is just as important for your short-term spending as it is for the habits you’ll have someday when you retire. Think about if wanted the income tax money now, filed more exemptions, and got bigger paychecks. You’d get comfortable with the extra spending money and it would be harder to break those habits later in life.
Like being a diet or training for a marathon, having a smaller paycheck helps me to keep my spending in moderation.
What do you prefer to do? Do you like to take the money now or wait for your big check at the end of the year? Have you just always done one or the other, or do you have specific reasons for doing so? Please share!
Photo credit: Microsoft Clip Art