Why Giant Tax Returns are Overrated

Tax Returns

If you’ve ever filed your taxes… Let’s start over. After you’ve filed your taxes (you should always file your taxes), there’s often some trepidation. The question “How much more will I owe the government?” is surely on a lot of people’s minds. However, with slick programs like TurboTax, you will instantly know what’s owed or what the return will be! In fact, you can see the amount in real time as you complete each form. So I highly recommend purchasing TurboTax or HR Block software (that’s what we use) if you’re not into…trepidating… Now that we’ve established I have a questionable vocabulary and what method we use to file our taxes, let’s turn to our 2015 taxes.

It was like friggin’ Christmas in March!

Like good little investors, we maxed out our traditional IRAs ($11,000 total allowed, since we’re married), and set aside a good amount in our 401Ks. After accounting for income, other taxable accounts, interest from savings, and mortgage interest, we delightedly found out we had a return of $1681 from the great state of Montana and $1478 from the Federal Government. And, as mentioned in a previous reno post, H&R Block also had a deal going that if you used your return to purchase a gift card of $100 or more, they’d match at 10%. So we got a $500 gift card to Home Depot (knowing we had our kitchen remodel coming up) and they tacked on an extra $50. In sum, we had a tidy $3209 tax return.

Of course, we stashed it away in savings and investments, so it wasn’t that fun. But getting large sums of money is still neat. Yet, in the back of my head (where all the serious thoughts congregate), I felt like that return was a little too big. Were we wasting our hard-earned dollars by overpaying the government every year? Couldn’t we have been investing that money along the way, letting it earn more than throwing a lump sum in once a year? The clear answer was “yes!” What I didn’t know was how to pay the government exactly what I owed. I was ashamed. Here I was, trying to retire early, talking up investing, budgeting and more and not a clue that the answer was a simple change to my W-4 form.

tax returns
Cool! Pineapple in a field.

Using my financial library “Google,”  I came across the IRS website. They have a nifty calculator where you can figure out how many allowances you should put on your W-4 form. Turns out, when I took my first real job four years ago, I had agreed to heartily pay more than my fair share of taxes.

Mrs. Fi did the same thing–I expect our invitation to the White House dinner will be coming any time now.

Long story short, we get to keep more of our paycheck, invest it, and come out mostly Even Steven when it’s tax time. If somehow you missed the boat on your W-4 form, you can always go back and change it at any time.

The process is simple! So don’t be fooled–large tax returns can seem cool, like finding a pineapple randomly in a field. However, it’s better to get some small pineapple seeds along the way so you can plant them as you go. Then you’ll have a whole freaking grove of pineapples! And who doesn’t love copious amounts of pineapple?

Comments

  1. our next life

    We have never managed to get it right, despite always trying to shape our taxes by changing our withholds on state and federal returns. Some years we’ve gotten HUGE refunds (like truly huge), and last year we owed a sickening amount. So now we just try to do our best in estimations, and accept that we can’t control it. Oh well, another item on the “short-term to do list,” that won’t be an issue after we retire in a few years! 🙂

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      1. our next life

        It was due in part to income growth, which made us go up a bracket and messed up the calculations, and once from selling our condo which was a huge interest deduction that we lost. But it seems like it’s always something!

  2. Claudia @ Two Cup House

    I remember a long time ago, I watched an episode of The West Wing in which they discussed tax returns as “tax-free loans to the government.” This has stuck with me ever since and I try to optimize my allowances to ensure the smallest return possible. 🙂

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  3. Mrs. Money Monster

    I love that there is an actual calculator from the IRS to figure this out. I usually just “play” with my number of allowances and see how that works out in my paycheck. Thanks for the link! As a fellow frugal quack (that’s a term of endearment coming from me 😉 I am totally grateful for you sharing!

    Mrs. Money Monster
    P.S. I used to also love getting the big lump sum refund. 😛

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      Mr. FI

      It’s pretty handy. TurboTax has a free one as well–I should’ve mentioned that. It’s also very nice, and actually a little more intuitive. But it gave me the same number of allowances as the IRS calculator.

      Thanks for stopping by and commenting!

  4. seattlegirluw

    I never understand people who are psyched for big returns. I mean, yeah it’s nice to have a lump sum to make a decision with. But… it’s your money!

    I get annoyed if we get a return of $500 or more. I prefer a $300 overage or less. Since I’m kinda self employed (S-corp), it’s tough to properly project taxes. Which means I’m fine with over paying a bit. Just not too much.

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      Mr. FI

      Hi!

      Yes, in the case of self-employment, better to be paying a bit more than owe. Plus, I know the temptation to blow a big return is a reality for a lot of people–by adjusting their W4s, they could be saving themselves from themselves.

  5. Fervent Finance

    They’re for the birds! I adjusted my W4 the other day since i did a little tax planning and realized I would get a ~$500 tax refund. My Vanguard account would rather have that money now!

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  6. Maggie

    Also there are a million stories in the news of people being scammed out of their returns and that is scary! The IRS doesn’t cover them. So… you could have been completely out that $3209. Scary stuff. I’d rather owe a bit!

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      Mr. FI

      Hi Maggie,

      That’s a good point! I think most things are on the up and up if it’s done electronically, but there is always risk there. I’d rather owe then, too!

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          Mr. FI

          Well, that’s disconcerting. I thought most was done through mail, ha. I can’t believe they are receiving less funding going forward. Priorities, people!

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