Posted by: thomstrat | March 13, 2010

Tax Refunds Are Not A Savings Plan

When I was in college I would get a decent chunk of money back every year as a tax refund. I would call it my “Government Savings Program”. That was until my brother explained it to me. I was giving the government an interest-free loan for up to a year using money that I could actually be earning interest on. My perspective changed after that.

Don’t get me wrong. I am in no way anti-taxes. I prefer a government to no government, and there are quite a few services I enjoy. I’m willing to pay for those, even if I don’t always agree with everything my taxes get spent on. It’s the price we pay for living in a country where we are free to complain about, protest, or even seek to overturn government taxation. I could post in this blog that I think taxes are criminal, and all politicians should be shot–and I won’t be noticed, let alone arrested, beaten, and/or shot.

However, there is no reason why we should float the government a large loan every year just so we can feel good about the sudden influx of capital every April/May. The reality is that we could have been using that money ourselves for a variety of good causes, such as stimulating the economy for real, not just on paper. All it takes is a little bit of bookkeeping and discipline on our part.

Your W-2 form allows you to claim deductions that reduce the amount your employer withholds from your paycheck for taxes. If you find you are getting more than $1000 back from the Federal Government each year you may try increasing the number of deductions you claim by one or two. The goal is to get as close to zero refund as you can, though a few hundred dollars over or under certainly isn’t a problem.

Then note the amount difference in your paychecks. This amount, if you are already living within your budget, is extra cash flow that can be used for a variety of things, such as savings, investments, or funding some of your self-reliance projects such as building up a reasonable reserve of food, building a 72-hour kit, or laying up a supply of firewood.

It is worth noting, however, that the federal government and the state government tax at different rates. For example, even though I get close to a $1000 refund each year from the US Treasury, at least half of that goes into paying the amount of state tax I owe. I don’t adjust my W-2 further because the difference between federal and state taxes are pretty closely balanced. I use one to pay the other and walk away a few hundred dollars left over.

I’m sure most of us have said–or at least thought–that we could use our tax money at least as well as the government does. Well, if your yearly refund is larger than it should be, here is your chance to prove it.

Thom Stratton enjoys tracking his money. He really does! He is also a Business and IT Consultant, and co-owner of two online business, Kitchen Riches and BT Game Vault.

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