Life in Transition

Navigating Personal Finances During Life Transitions

The Tax Withholding Debate

My co-workers and I have been talking about the checks (or lack of in my case) that we will expect during tax season.  Most of them like to have as much taxes withheld as possible.   One guy who started working here as a bachelor had not changed his withholding once, even though since then he has gotten married and now has an two-year-old daughter.  So, between him and his wife, he’s expecting a $6000 refund.  I asked him why he never changed his withholding.  He gave me the following reasons:

  1. It’s a nice psychological boost getting a big fat check from the IRS
  2. It forces him to save money.  To him, it’s equivalent to automating saving, except the government holds on to the money instead of the bank
  3. It forces him to live below his means, since he gets a smaller than normal paycheck each month
  4. A large check gives him and his wife an opportunity to discuss the progress of their annual financial goals and priorities

I, on the other hand, prefer to pay the right amount of taxes throughout the year instead of overpaying, and get a small refund  instead.  Here are my reasons:

  1. I hate seeing so much of my hard-earned cash being taken out of each paycheck
  2. I tend to be OCD about my money, so getting a slightly bigger paycheck  throughout the year makes me feel like I’m have more control over my finances.
  3. I like to make my money work for itself, so to me, giving the government an interest free loan is a bad deal when I can earn 4% interest if I park the money in my rewards checking account
  4. I think I’m disciplined enough to save money on my own throughout the year

In the end, I don’t think one way is better than another.  I think each person should make their decision based on their needs, priorities, and money management style.

Do you prefer a large refund check once a year, or do you prefer getting a little bit more money on your paycheck throughout the year?

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9 thoughts on “The Tax Withholding Debate

  1. Emily R. on said:

    I’m with you. I like getting a little money back but not more than a few hundred. I think there is also the issue of whether you would use found money differently than your income. If you allow yourself to blow your tax refund because you feel like it’s a windfall, then I’m sure it’s better to limit your withholdings. But if you put your refund toward your savings goals and it makes you feel good to get that boost, that’s not so bad. I like using found money differently than income, so it’s better for me to not get a big refund.

  2. Honestly, I prefer something along the lines of $500-$1,000 in tax refund. But I’m just happy I only owed $90 this year. And that’s with maxing out 401K and putting 0 in my withholding. I’d MUCH rather get a refund than have to owe more money. The most I’ve owed is around $1,000+, and it was painful having to fork over that money.

  3. I like getting a bigger cheque at the end of the year, too. It makes me put money aside subconsciously.

  4. I find it incredibly difficult to estimate my taxes. This year I got a huge refund. Mainly from paying SS twice, having a cross country move and a business that didn’t do as well as I hoped (b/c of cross country move). I would prefer to hit the tax liability perfectly, but it has never happened for me.

  5. I’m with you in that I try to get my withholdings as close to accurate as possible. Tax is withheld weirdly on my bonuses, so I re-do the calculations after a raise and after a bonus to make sure that my end of year tax result is pretty close to zero. There were a few years where I got about $2,000 – $3,000 back, which is way too much. This year was under $1,000 and hopefully next year will be even closer to zero!

  6. I’m still not sure what my allowances should be. I got a huge refund this year so I adjusted my allowances – I’d still like to get a nice refund but the more I can get back each paycheck, the better. I think I’ll still get a hefty refund next year – and then I’ll just my allowances again. I never want to owe anything.

    • There is an IRS withholding calculator that I use to estimate my withholdings. Just google “IRS withholdings calculator” and it should come up. That made a huge difference for me!

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