It’s Tax Season!
Have I mentioned how I find February to be the shittiest month of all the months? I’m sure it’s fine if you live anywhere other than the frozen tundra of the midwest, but in February you’re still not all the way through winter. There is a stupid groundhog that almost always sees a shadow. And you’ll have to dig your car out of a foot or more of snow at least twice. It’s gross.
But there is one thing that I look forward to in February. Taxes!
No, no… I’m not that much of a sadist. I pay someone to do my taxes. But… I almost always get a tax return each year and so I look forward to that little mini-windfall each year.
There are two schools of thought on this. Some folks hate giving the government an interest free loan. Or, at least that is their mindset. Then there are the folks like me, who don’t mind paying a little more each month in taxes and then claiming back what’s mine during tax time.
Why do some people get money back when they do their taxes and others owe the IRS? It all depends on how many allowances you claim on your taxes. If you claim zero that means you’re allowing your employer to withhold the maximum number of dollars from your paycheck for tax purposes. Most people who claim zero are single, young adults who probably still live at home or are on their parents insurance.
If you claim zero, you will most likely get a decent sized tax return from the IRS. That’s because you allowed a little extra to be taken out of your paycheck each month and you’re getting the overpayment back at the end of the year.
If you are single and living independently or even married without kids, you might choose to claim one allowance. This gives you a bit more money back in your paycheck each month and will probably result in you getting a refund from the IRS.
If you claim anything more than 1 – because you have kids or other dependents – there is a good chance you won’t withhold enough money from your taxes and you may end up owing the IRS money at the end of the year. (Side note: I don’t have kids but I do know there are lots of other credits that you might claim in order to even this out so that you do get money back at the end of the year. But I’m just speaking generally here).
So, why do we care about this? Well, if you’re bad with money, can never seem to manage to save a dime, and generally spend all of your check each month, you might want to try claiming fewer allowances.
Why? Because that little windfall when you do your taxes and get some money back from the IRS is a built in savings plan. All of a sudden you have another $1000 or more that you can stick into your emergency fund or your Roth IRA and you didn’t even have to do anything to get it!
Now, if you’re disciplined at saving, you might not need this help. But even if you are disciplined in saving, I still don’t think it’s a bad idea! Chances are you might not even notice the extra income that’s being withheld from your check and then once a year you’re looking at a decent mini-windfall of cash!
I’m not a paranoid or a conspiracy-theorist so I have no qualms about letting the government hold onto my money for a little while. There are some who claim that you’re giving the government an interest free loan and that money will do more for you if you just invest it yourself instead. That’s true.
But you have to invest it for that theory to hold water. If you don’t invest it. If you spend it instead of saving it…. Well then it still doesn’t do anything for you. So if you’re much more likely to drop that lump sum into a retirement vehicle once a year than to invest monthly – this is a good system!
That right there is the trick though! You need to invest that windfall. Don’t plan on it. Don’t tell yourself you’re ear marking it for anything OTHER than retirement. Just pretend that money doesn’t exist and when it does show up don’t be tempted to spend it on frivolous things.
Outsmart your own self. You can do it!