Wednesday, February 02, 2005

Why You Don't Want A Tax Return

So, now that January's over you have a W-2 and you're busy trying to figure out the best way to get that money away from the government and into your own hands.

You start hearing things like, "Oh, my sister's brother-in-law has an uncle who's going to do it for me," or "My daughter's friend is studying to be a CPA, so I think I'll ask her."

I'm sure everybody who majored in anything close to math dreads this time of year, because they get W-2's shoved at them from every angle from people with puppy-dog eyes and pleas like, "I really need to get $2,000, so I can use it as a down payment on a car."

You want to get money back from the government every year, right? As big a check as you can, right?

Sorry, friends, but no you don't.

You really don't.

You don't want Uncle Sam to give you back one thin dime.

Shift your mental gears for a moment. Imagine a friend of yours comes up to you and hands you two thousand dollars, cash. "Here you go," he or she says. "Take it with my blessing."

"Wow," you say, because although your friend can be helpful, you didn't think they had this kind of money. In fact, they're usually broke, so them having extra to give you makes no sense. You say the only thing you can think of: "Thank you!"

"Don't mention it," they say. "It's actually your money. I've just been taking it here and there where I could, and I thought you could use it back, now."

Would you be grateful to that friend any more? Would the two thousand dollars seem like a very generous gift?

Or would you want to blurt out something like, "You idiot! I could have been using that money all this time to pay down this high interest debt that I have! How long have you had this?"

"Oh, about a year."

"A year? I have debt that costs me 25% interest! You taking this two thousand dollars cost me five hundred bucks!"

Or, if you don't have debt, "I could have put this in my mutual fund and earned two hundred and sixty bucks!"

Or, if you think saving and paying off debt are a waste of time, "I could have blown this on DVDs and pizza!"

The point is, someone else using your money for a year isn't a great proposition. Yet we keep doing it, year after year, when we have too much withheld from our taxes.

Why do we do this? I think there are a few reasons.

1. We actually think we're saving money.

If we're putting money somewhere that we can't get to it for a while, that's a form of saving, right? So if I have extra taxes withheld, I'm giving money to the Government I won't get back until the end of the year. It's like a forced savings plan, isn't it?

No. To borrow an analogy from Robert Allen, a dollar is like a seed. If you plant it in the right place, it will grow. Saving and investing consist of putting the dollars in one of those places. If you want to save your money for a year, your banker will be more than happy to take it away from you for any period of time you would like--they call it a Certificate of Deposit, or "CD" for short. Unlike Uncle Sam, they'll give you some interest on your money.

2. We don't want to run the risk of having to pay.

I'm one of these. While I don't love the prospect of letting Uncle Sam have an interest free loan for a year, it does sound more appealing than having to pay him when the year is up. I have enough debt already. Do I really want to add the Federal Government to the list?

Really, paying back money to Washington isn't as bad as you think. It's almost like the above scenario, turned upside down. You get to be the friend who comes back at the end of the year and says, "Oops. I think this is yours." You get to be the friend who gets the free loan.

In fact, why not use that paranoia you have that the Men In Black will come and haul you away as a motivation to start really saving something? If you think your deductions came down by too much, take that amount and put it in a savings account every month, or a money market account, or somewhere that it will earn you something. Every time you're tempted to grab it, just picture Tommy Lee Jones getting out of a black Mercury in front of your house with a ray gun.

At the end of the year, if the government does want money, you're covered and you still have the interest to play with. And if they don't want it, you're golden--that money is yours now, free and clear.

I'm not suggesting you increase your withholdings above what really belongs to the government. The ideal scenario is that you pay them a couple of hundred dollars, or you pay them a couple of hundred dollars. But if you're getting back checks with four or five digits to the left of the decimal point, and you're excited about it--

Well, I've got a deal for you. Why don't you just sign that check over to me? I promise to give you back the same amount in a year, and you can get just as excited about it all over again.

Or doesn't that sound like a good deal to you, when you really think about it?

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