Tax Refund = Tax Fail
Mar. 7th, 2021 08:19 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
canyonwalkerI wrote earlier today that I filed my 2020 taxes and am due a refund. How much of a refund? Well, it's a split ticket. For our federal taxes we owe money, a bit less than $1,000. For our state taxes we're due a refund, a bit less than $2,000. Adding the two together, we'll net around $1,000 back.
Great news, right? Well, not really. I'm happy with where I landed with my federal taxes: owing money, but not so much that the government charges us penalties or interest for underpaying. For state taxes, the sizable refund indicates a fail in my planning efforts.
Wait, what? Refunds are bad? Yes, really.
I know that's an unpopular view. Most people I talk to count coup by how big of a refund they get. Like, bigger refund = smarter. The funny thing is it's actually the other way around. Bigger refund = bigger fail.
Why is getting a big refund a fail? Isn't it a win because you're getting more money from the government? No, because it's your money, dumbass.
When you overpay the government through paycheck withholding or quarterly payments throughout the year, you are lending them your money. And when you file your return the next year, they're paying you back— with no interest. You're giving them a zero-interest loan. Where else in life would you invest money with the promise of zero return?
This is part of why I quip that I start working on my taxes over a year before they're due. I've created a spreadsheet I use to estimate my taxes. All throughout the year I refine my estimates of income, deductions, and taxes withheld. I use those figures to adjust my withholdings. As I noted above, I target owing a bit of money each to fed and state.
Sometimes this planning is hard. I mean, even with my experience that makes the ordinarily hard stuff not so hard, sometimes it's really hard. For example, last year I nailed the target on my federal taxes but slipped on state taxes. That happened because I had a really large charitable deduction (see Giving Like the Big Guys) that I factored in correctly for my federal taxes but biffed the estimate for my state taxes. Like I said, it was a slip. I've got more expertise now, so I won't make that type of slip again. But there are always unknowns that can happen. One of us could lose a job later this year or switch jobs. Either could render my current estimate off kilter. Thus I'll keep checking and revising my estimate every 2-3 months.
Great news, right? Well, not really. I'm happy with where I landed with my federal taxes: owing money, but not so much that the government charges us penalties or interest for underpaying. For state taxes, the sizable refund indicates a fail in my planning efforts.
Wait, what? Refunds are bad? Yes, really.
I know that's an unpopular view. Most people I talk to count coup by how big of a refund they get. Like, bigger refund = smarter. The funny thing is it's actually the other way around. Bigger refund = bigger fail.
Why is getting a big refund a fail? Isn't it a win because you're getting more money from the government? No, because it's your money, dumbass.
When you overpay the government through paycheck withholding or quarterly payments throughout the year, you are lending them your money. And when you file your return the next year, they're paying you back— with no interest. You're giving them a zero-interest loan. Where else in life would you invest money with the promise of zero return?
This is part of why I quip that I start working on my taxes over a year before they're due. I've created a spreadsheet I use to estimate my taxes. All throughout the year I refine my estimates of income, deductions, and taxes withheld. I use those figures to adjust my withholdings. As I noted above, I target owing a bit of money each to fed and state.
Sometimes this planning is hard. I mean, even with my experience that makes the ordinarily hard stuff not so hard, sometimes it's really hard. For example, last year I nailed the target on my federal taxes but slipped on state taxes. That happened because I had a really large charitable deduction (see Giving Like the Big Guys) that I factored in correctly for my federal taxes but biffed the estimate for my state taxes. Like I said, it was a slip. I've got more expertise now, so I won't make that type of slip again. But there are always unknowns that can happen. One of us could lose a job later this year or switch jobs. Either could render my current estimate off kilter. Thus I'll keep checking and revising my estimate every 2-3 months.
no subject
Date: 2021-03-14 08:22 pm (UTC)