Life in Transition

Navigating Personal Finances During Life Transitions

Archive for the category “Taxes”

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?

It’s Tax Day

In honor of Tax Day, I’ll share my total tax rate for 2011, and a breakdown of my taxes.  Overall, I paid an overall rate of 18% tax on my total income.  My tax bill breaks down to the following:


Federal 7.20%
State 4.10%
FICA 4.40%
Local 1.80%
Vehicle 0.30%

My overall tax rate is fairly low, and I think the main reason is that I worked full time for only half of the year, thus a low annual income.  I worked a little bit when I was still in school, but more more than 12 hours a week.

I ended up getting a federal refund for $112, but I owed the state $171, so overall I had to write an extra check to pay my taxes.  I know that owing a net balance of -$59 is not big deal, but psychologically it’s painful to write a check to the government, especially when they already take out money throughout the year.

How much did you pay in taxes in 2011? Did you get a refund, or did you have to write a check to the IRS?

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