It’s that time of year again. We are well into the new year and our New Year’s resolutions are in full swing. (Well, I hope they are anyway. Have you been keeping up with your resolutions?).We now enter tax time. Many of us are eagerly awaiting a nice, fat check from Uncle Sam. Or perhaps this is a time of year you are dreading in fear that you will owe. For me, breaking even or as coming close as I can is the best option.
Most years, my wife and I expect a pretty nice refund check. We typically plan on using the bulk of our refund toward debt pay down. Last year we also used our refund to create our planned event envelopes (See “Planned Event Envelopes”), which was a decision I am glad we made. I will certainly continue this system again this year. It took away a lot of cash flow stress throughout the year.
Minimizing The Refund
Although I plan to continue this system, I may need to make alterations because my new goal is to get a smaller refund (Yes, you read that right 🙂 ) For 2017, we increased our allowance in hopes to get a smaller refund this year. Turns out that with the birth of our second child as well as some adjustments made to our 401k plans, we ended up getting a larger return than we had in the past. It is nice to see that in the bank account, but this is actually not what I was wanting, or expecting.
Some of you may be thinking I am crazy for saying this, but I am glad to explain. My goal each year, starting with last year, is to not owe anything back in taxes (just like everyone else), but it is also to not get a huge check from the government. Here’s why. When you get a tax refund check, it simply means that you overpaid on your taxes throughout the year. So essentially you are giving the government a loan, interest free. I don’t know about you, but I can think of better ways to put my hard earned money to use.
While this is all fine and good, personally I would rather have that money back in my pocket throughout the year. There are certainly times that more in the check could have come to great use (I forgot just how much diapers, formula and other baby essentials can add up to.) To do this, what I did was increase my allowances by 1 on my W-4. My wife did the same. This causes less taxes to come out of our paychecks and we see an increase in our take home pay. I originally heard of this idea from Dave Ramsey. After sitting down and discussing our taxes with my CPA last February, she suggested the same thing so I decided to give it a whirl. Having now filed and received my return, it was not what I was expecting. I guess having another dependent does make quite a difference.
Another reason that increasing allowances can be good is that the larger paycheck also will allow me to have more to work with in my monthly budget. This can help to relieve some financial pressure. By having a little bit more each month, more money can be allocated to debt pay down, which brings me closer and closer to the ultimate goal, financial freedom.
Yet another reason this is a good thing is that many of us, myself included, are emotional spenders. When we see a big fat deposit from the IRS hit our checking account or we see that check come in the mail, we get a rush of that feel-good dopamine. The downside is that this many times is a recipe for unneeded spending. We cash that big check, hit the shopping mall and as quickly as we saw our bank account increase, we see it deplete again. It can certainly be hard to maintain self-control, which is why most people are in debt in the first place.
Changing the Mentality
What really interests me, however, is the money mentality change that this forces. Now that I expect a lower return, it forces me to better manage my finances throughout the year. In years past, larger expenses would come up. I would always say that I would take care of them when our tax refund was deposited. When going about it this way, it is easy to lose track of all the things I put off. Before I know it, there is not enough money to complete all the things on the list.
By expecting a smaller refund, this problem eliminates itself. This year, I had no expectations or pre-planned goals for the refund money. This allows me to continue to work on my debt payoff plan just like I always have and whatever refund I receive I treat as an extra bonus rather than planned income to put toward debt payoff. Interestingly enough, this gives me peace of mind. Call me crazy, but knowing that I get a little bit extra in each paycheck throughout the year allows me to better manage my finances. In the long run, this helps me to better achieve my financial goals.
I was interested in seeing how much this will impacted my refund this year. Now I am considering knocking the allowance up to 2. There is a risk here, however. Before you go all crazy with your allowances, you may want to talk to your accountant or tax professional. If the allowances are set too high, you may end up owing the government rather than getting a return! Depending on your situation, this could be a substantial amount, so proceed with this idea with caution.
Do you expect a refund this year? Do you think you may owe? Is tax time a time of stress? I would love to hear from you in the comments below.