The Bigger The Tax Return The Worse Off You Are

It's that time again where everyone is rushing to gather up their 1099's and W-2's to start filing their taxes. Hooray for tax season! What I've been hearing quite a bit lately about taxes is people saying how much they got or will be getting back from the government. Almost every time I hear someone talking about the amount, they are usually extremely happy to share that they got a huge amount back. If you're one of those people who share this with everyone or just someone who still receives a large chunk back from the government every year, there's something you definitely need to know.

The larger the amount you get back from the government, the worst off you are (generally speaking). There's only ONE situation where getting a large amount back MAYBE reasonable. Before I talk about this one reason, let me explain why a large refund check is bad for you but great for the government. The amount that is deducted from paycheck every month is based on your W-4 selections, which is basically how many deductions and/or dependents you claim. The more deductions and/or dependents you claim, the less tax that will be withheld from your paycheck. The opposite is also true. So, let's say that you claim less deductions/dependents than you normally will at the end of the year (filing taxes), then you will end up paying the government more money throughout the year. Of course, you will get this back in a refund check. The reason why it is so bad for you to give all this money to the government upfront is because you are loaning money to the government interest free. The money that the government withholds from you will be invested and returned to you without any interest (refund check). If you get a very small refund check then that means you calculated it near perfect where you pay just the right amount every month from your paycheck. Unlike the first scenario of a large refund check, you'll get this money every month versus at the end of the year (refund check) so YOU can invest it and gain interest from it. If not, you end up losing a years worth of interest bearing money that you could have invested.

Note: If you end up owing the government money then they will charge you a penalty, which is basically their way of saying you owe them interest on that money.

Now the only case where I suggest getting a large refund check is MAYBE beneficial for you is that you are an uncontrollable spender. The more money you make the more you spend. This is already a bad habit to have to begin with but let's say you're in this boat. If so, maybe giving the government more money every month will help limit what you spend throughout the year. The only caveat to this is that when you do end up with a big refund check at the end of the year, you don't go out and spend it all.

Article Source: http://EzineArticles.com/7630289


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