Every person with a pulse loves a few thousand dollars flying into the house every year. Nevertheless, for the first time ever, I don’t want to collect a tax return next year. And neither do you!
Before you call me crazy, hear me out. What is disguised as a bonus every year, is actually us lending the government money. To make matter worse, it’s an interest-free loan.
The Extra Cash Is Yours
What appears to be a bonus check every year, is truthfully your own money to begin with. The money you work hard for every day at your 9-5 job to be exact. So how does it end up with Uncle Sam? Via your income tax withholding elections – state as well as federal.
If you have been receiving a tax return over the past years, it is time to pay fewer taxes with every paycheck. Having a few hundred dollars more every month to work with and work for you sounds far better instead of collecting a lump sum at the end of the year.
I myself have been receiving $2,000 on an annual basis for a number of years. This coming year, I am determined to bring this down to close to $0 by raising my federal tax withholding election from “0” to “1”. I did, however, leave my state tax withholdings untouched at “0” as I rarely receive a sizable state tax refund. Either way, the goal is to not collect a tax return next year. Or, at a minimum, collect the least bit of money possible without owing Uncle Sam in the end!
You Are Not Alone
If you did receive a tax refund for the 2016 tax year, you are in “good” company. In 2017 alone, the IRS issued $302 billion in refunds. A staggering number averaging to $2,782 per tax filer. And, understandably so, 62% expect a refund as well for the 2017 tax year.
Now, imagine for just a few minutes how much interest the government collected on the $302 billion. And, most importantly, how much interest the government did not pass on to the taxpayers. But instead pocketed and used for its own purposes. Whatever those may be.
Tax refunds are desirable for many for different reasons. Some look at it as bonus cash to pay bills or go on vacation with. While others have become so used to receiving a refund, the thought of adjusting the withholdings election doesn’t even cross their minds.
No matter what the reason is, if you have collected a tax refund over the last few years, you have lent the government interest-free money. Because Uncle Sam isn’t required to pay you interest on the money it has collected over the past twelve months and held on your behalf until refund time.
I Don’t Want To Collect A Tax Return Next Year. And neither do you!
The thought of handing the government my cash, so it can collect interest on the money throughout the year and not pay me that interest, irks me to no end. And I’d imagine the thought irks you as well. Especially, because Uncle Sam keeps the interest on top of the taxes collected.
So, the best course of action is to raise your federal and state tax withholding allowances as appropriate. With the ultimate goal being to bring your tax return as close to $0 as possible and pay the government as little tax as possible throughout the year.
Why bother? Why not collect a lump sum payment at the end of the year and call it a day? Because the opportunity cost is simply too high?
Don’t Collect A Tax Return Next Year
Instead … Put Your Cash To Work For You
Instead of handing over your hard-earned cash to the government, there are a great number of better things to do with that money. No matter if it is an extra $50, $100, or $500 per paycheck. Every additional penny in your pocket can lead you to a more financially secure and happier life.
If you are struggling to pay a few of your bills each month, simply because there never seems to be enough money to pay for it all, receiving a tax refund makes no sense. Collect the money you have earned and are allowed to keep on a monthly rather than annual basis.
Using the money to get caught up on all bills will give you more satisfaction than the annual fake bonus check ever will. Don’t give the government your extra cash. Use it to not incur late fees instead!
Pay Off Debt
American households, on average, have two credit cards and carry around $5,550 worth of debt from month to month. Given that some credit cards come with interest rates of upward 15%, carrying this large of a balance can be downright depressing.
Instead of letting Uncle Sam collect interest on your money, collect the money yourself and use it to pay off debt. May it be credit card or other debt. Don’t hand your cash to Uncle Sam. Use it instead to incur less or, even better, no credit card interest!
Build An Emergency Fund
Emergency funds are the bread and butter of financial peace of mind. So many things can happen to all of us day in and day out. A broken down car. A leaky roof. Or (hopefully never) being laid off from a job. Getting more money in your paycheck will help you put that money toward your emergency fund.
And, all of the sudden, certain emergencies won’t be a potential nightmare any longer. The government doesn’t need to hold on to your extra cash. Stash it away for emergencies instead and sleep better at night!
Save More For (Early) Retirement
Retirement is your golden ticket to the ultimate freedom in life. Freedom from your 9-5 and your boss as well as the need for a recurring paycheck and, most importantly, to do whatever you chose with your life.
Keeping the cash you usually get as a year-end refund and making it work for you by shifting it into your retirement account instead will mean greater returns and a larger retirement stash in the future. The government doesn’t deserve your extra money. Stash it away for retirement instead!
Related: THE definitive guide to retirement savings account types – all in one place!
Invest Extra Cash
If your retirement accounts are maxed out, your emergency fund is well funded, your bills are paid in full every single month, and you are receiving a refund, you find yourself in a unique and opportunistic position.
This is the perfect time to sign up for a brokerage account and invest more than in “just” your retirement accounts. Investing any extra cash you have will set you up for an even sooner retirement. Uncle Sam doesn’t need your extra cash. You do!
The Plan For 2018 And Beyond … Don’t Collect A Tax Return Next Year
It is never too late to adjust your federal and state tax withholdings to collect more money in your paycheck instead at year-end. Contacting your HR department and requesting to adjust your W-2 will take a few minutes only. And the financial downstream effects will be well worth it!
Instead of handing out tax-free loans to the government, hold on to your money instead and make it work for you. I personally went from zero federal exemptions to one for the last quarter of 2017 and going into 2018. So my year-end tax return averaging $2,000 will go down to close to zero.
Will you change your withdrawal elections to not collect a tax return next year?