The Best Tax Refund is $0
You read that right, it is zero, nada, zilch, a big goose egg.
Sounds ridiculous, doesn’t it? But we are only required to pay income taxes – sending more money to the Governments than necessary is NOT what the IRS wants us to do.
Granted, it’s much better to get a refund than to owe, but getting a big refund check is like having Uncle Sam hold your money for you until April 15th, and you don’t get to use it or earn any interest on it.
In our example from Tax Refunds: Part 4, we used the example of someone whose tax liability was $3,600 but withheld $6,000 for the year. That’s $2,400 too much being withheld. Wouldn’t it be better to bring home an additional $200 a month ($200 x 12 months = $2,400) and pay down some debt or even put it into a crumby savings account that will earn you some interest? $2,400 at 1% over the year would generate $24 in interest, the tax refund doesn’t give you ANY advantage (it even costs you gas money to drive to the bank to cash it).
Another example why $0 is better than a refund: A friend of mine was looking forward to their $1,300 refund because it would help them pay down some credit card debt. The credit cards were charging them 9.99% interest on the balance. If they had brought home $100 extra each month and applied that to the credit card debt instead of having it in a refund April 15th then they WOULD HAVE SAVED A MINIMUM OF $83 IN INTEREST CHARGES ALONE over that 12 month period.
So how do you get a $0 refund? It’s not an easy calculation, and it will never be exact, but you get closer to hitting a home run if you swing the bat. Instructions on how to calculate your withholding are on page 2 of the W-4 form. Follow the directions, complete the certificate at the bottom of page 1, and submit to your Human Resources or Benefits department.
And remember, no one is a big winner when you get a big refund. It was your money in the first place. The best refund to get is NO refund.
Read the other articles in this series: