Does that sound crazy? Maybe, but it’s probably not a new concept. You’ve likely heard someone say that when you get a tax return, you’ve given the government an interest free loan. I don’t necessarily buy that line of thinking, but it is true that getting a tax return means you’ve paid more in taxes than you need to.
What are the practical results of that? Well, when you get a tax return, you’ve been taking home less than you could have with each pay check. That might be substantial. If you get a $4,000 tax return, you’ve been shorting yourself $333 every month from your take home pay. I don’t know about you, but I would love to take home an extra $333 each month. That goes a long way towards groceries in my house.
Think of it like this. The next time you get paid, take $200 from your check and give it to your in-laws, or a friend, or anyone you trust. Tell them you’ll be giving them this money every time you get paid, and then next spring, you’ll just ask for all the money back.
If you’re wondering why you would do that, I can’t tell you, but that’s exactly what you’re doing when you get a tax return. Except it’s the federal government, and not a friend, that’s holding your money.
Now, there’s a line of comfort here that each of us needs to determine for ourselves. If you adjust your withholding so you don’t have enough taken from your check, you’ll owe money come tax time the following year, and no one wants to be in that situation. The IRS will get their money every time. It’s better to get a small return than to owe taxes. How much should that return be? That’s up to you. I try to keep my return under $500. The IRS has tools to help you figure this out.
It’s hard to say goodbye to that multi-thousands of dollars deposit every spring, especially when it feels like free money. But it’s not free money. It’s your money. And you should have access to it as soon as you earn it. Take it home on your check, don’t send it to the government.