Tax refund

Accountants and financial planners will advise you to set your deductions on your W4 form so that you get your money during the year. This is good advice because you'll be able to use that money all year long, put it in investments and make more money off of it, rather than let the government borrow your money interest free all year long.

However, I feel this is extremely bad advice.

The reason I feel this way is this: For a few years I followed this advice, I had my accountant figure out what to claim for deductions on my W4 form, and sure enough I had more money in each paycheck. However, at the end of the year, when I filed my taxes - I OWED money. It wasn't that much the first time, maybe $250. And I found the money and paid it. But the next year, when my acountant finished the taxes he said "So just write out a check for $3,000 to the IRS and $1,000 to the state and I'll put all this paperwork in the mail". What? FOUR THOUSAND DOLLARS? Where am I going to get $4,000? And he said something I'll never forget "Well you did put that extra money each paycheck into savings, didn't you?" Uh, no, I thought you said that if I claimed married and nine I'd break even at the end of the year, I spent it all.

So I've changed to the following philosophy.

Claim single and none, and if you are single and none, have an extra amount ($50 or so) taken out each pay period.

At the end of the year, when you file taxes, you'll get a refund.

It's a lot easier to put a single check into a savings account or CD than it is to do it ever pay period. Especially if you're living "paycheck to paycheck".

But what about the interest?

Let's say you get a refund of $1300 (which is what you'd get if you had $50 extra taken out as above).
If you'd put that $50 into a savings account at .25% (1/4% - based on internet search on March 2nd 2005), over a year you'd have put in $1300, and would receive $1.63 in interest. Yes, that's right one dollar and sixty three cents. If the interest rate is as high as 5%, you'd get a whopping $32.
For me, if I let the government have their measly $1.63 but I get a check for $1300 at the end of the year, I'm happy. See, if I didn't put it into this "government savings account" I'd just have spent it anyway. This way I've got a check for $1300 that I can either put into savings, or go to Florida for a week.

Yeah, I'll gladly pay $1.63 or even $32 (if savings interest ever gets to 5% again) for them to collect that money for me.

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