Would you rather have a larger paycheck or a larger tax refund?

[kristinecfp]

Okay, I don't get it. I'm a CPA and it's tax season. Every year, this just boggles my mind.

Why would you want to have extra money withheld from your paycheck each week/month/payperiod, just to get it back at tax time?

Even before I was a CPA, I wanted as much money in my paycheck as possible, even if it meant I owed uncle sam at the end of the year.

I would much rather use that money during the year to save for retirement, or save for a vacation, or just to pay off bills (especially if they are high interest credit card bills) than to get a large refund at tax time.

So... what about you guys? Would you rather get a bigger paycheck each payday, or would you rather get a bigger tax refund?

[scfr]

Re: Would you rather have a larger paycheck or a larger tax refund?

Yes, the business of being happy about a large refund year after year is mind-boggling, isn't it? It's NOT a gift from the IRS!!!

We're both self-employed so we have to pay estimated taxes. Of course we just pay what we are required by IRS rules to pay (just enough to avoid a penalty), which is usually based on our total tax bill for the previous year. Sometimes it means a refund, sometimes it means paying. We're happy if we have to pay because it means we made more income!

I don't know of anyone who intentionally pays extra on their estimated taxes!!!

What if, instead of having their taxes automatically deducted from their payroll, people had to send a check to the IRS each pay period? [Sort of an estimated tax for employees.] I'll bet those same people who are excited to get a refund would figure out pretty quick how to adjust their payments to just the amount they had to pay to avoid getting in trouble with the IRS.

[MarianneJ]

Re: Would you rather have a larger paycheck or a larger tax refund?

***Can I choose BOTH!!!***

I think it is psychological. Although I have been at this personal finance hobby for the last 5+ years and know that it is better to have less deducted from the paycheck (which I have not had for almost a year...what do they look like again?!), I also understand the feeling of excitement that comes from getting a large refund. We got a huge refund because of EIC this year and it is a good feeling to be able to finally pay some bills I have been putting off.

Especially if it is only a couple dollars extra in a weekly paycheck, it just does not have the same allure as the hundreds or thousands you see in lump sum in a tax refund.

I think it is a more cut/dry answer if the difference would actually make an obvious difference in take home pay each week, but I think most people who have maybe a $20 or less difference a week in pay just don't see how that $20 would change anything. However the $1000+ that the $20/wk adds up to makes a great vacation fund when they get that tax refund check.

I am babbling, but what I think I am getting at is that I think many people use the tax refund as a sort of Christmas Club account that pays no interest!

[kristinecfp]

Re: Would you rather have a larger paycheck or a larger tax refund?

***Can I choose BOTH!!!***

LOL - I almost included that as an option, but I knew EVERYONE would choose that one!

[kristinecfp]

Re: Would you rather have a larger paycheck or a larger tax refund?

... I think many people use the tax refund as a sort of Christmas Club account that pays no interest!

That's another thing that bothers me about this. If you saved the money throughout the year instead of giving it to Uncle Sam, you could earn something on it. Maybe not a lot, but wouldn't you rather have an extra $10, $50 or $100 at tax time because you saved your money in a high interest money market account or CD (or retirement account), instead of giving Uncle Sam an interest free loan?

[MarianneJ]

Re: Would you rather have a larger paycheck or a larger tax refund?

Absolutely, you and I know that if we take that extra $20/week and put it in a savings account at the bank and don't touch it that we will have more.

The problem is that a) people aren't educated in personal finance, b) they aren't disciplined enough to NOT TOUCH IT. I think it can actually be a good thing to get the refund for those who fall under the second category.

The people under the first category are who we all try to reach on this forum.

[Ima saver]

Re: Would you rather have a larger paycheck or a larger tax refund?

I don't want to give uncle sam an interest free loan every month![Automated by GetSmile]

[kv968]

Re: Would you rather have a larger paycheck or a larger tax refund?

I've had people at work tell me that although they'd like to get the money throughout the year instead of one big check, they know that they'd just end up blowing it instead of investing it. Here's what I suggest to them...

I tell them to change their W-4 so that instead of claiming no one, they claim one or whatever is relevant to the situation (where I work we can change this online practically every week). Then see how much difference there is in their take-home pay. Whatever percentage that is of their salary, add that much to their 401k plan while continuing to claim one exemption or whatever it is they bumped it up to. That way there's no difference in their take-home pay and the "extra" is automatically invested for them. Granted you have to do the math to make sure you're not going to end up paying Uncle Sam at the end of the year and it won't work for everyone's situation (ie. 401k maxed already out, etc.) but that's a simple solution I've found for many.

[poundwise]

Re: Would you rather have a larger paycheck or a larger tax refund?

Kristine, I've struggled in this discussion with peers in the past but I've come to the conclusion that for many (most?) of them, had they the extra money in each check, they would spend it.

Possibly. But then the question becomes, "What do they do with the tax refund?"

Ans: Spend it.

[Broken Arrow]

Re: Would you rather have a larger paycheck or a larger tax refund?

My ex and I used to love tax time, because it meant getting a big fat refund! And yes, then we'd proceed to spend it on some shiney-shiney. Of course, I didn't understand anything about taxes back then, but now I do, and from now on, I want to try to get it so that I don't owe anything... but I don't want to play that game of owing Uncle Sam a lot of taxes either.

[LuckyRobin]

Re: Would you rather have a larger paycheck or a larger tax refund?

I'd choose having the money throughout the year, every time! Unfortunately we're stuck with a big tax refund. DH works 2 weeks on 2 weeks off, but he is taxed as if he were making the same amount all four weeks in the cycle and there is absolutely nothing we can do about it. We've tried. HR is sick of us.

[Lori63]

Re: Would you rather have a larger paycheck or a larger tax refund?

We are getting a huge refund that is being used to pay down credit cards, pay off van, etc.
We will be changing our withholding-our refund is big due in part to college expenses-I had no idea how that would affect our return, but now I do.

[Scanner]

Re: Would you rather have a larger paycheck or a larger tax refund?

I want my taxes to reflect a balanced budget.

[MonkeyMama]

Re: Would you rather have a larger paycheck or a larger tax refund?

Oh you know it boggles this CPA too.

Before kids we had plenty of money and I actually wasn't doing taxes and didn't understand them as well. So we got the big refunds, whatever. We were smart enough to take a lot of exemptions when we got a house though - to help afford it.

Anyway, when we went down to 1-income I squeezed another few hundred per month out of my check by decreasing our withholdings. IT makes all the difference. We still got on average $1k-$2k back every year, just found out way - my boss's software was calculating the state exemption wrong. So this year was good - we only got $200 back and I was VERY pleased since it was in the bank earning high interest rates instead - woohoo. Actually he was still withholding too much but we did a rOTH conversion I thought I would owe a bit and it was nice not to. But I upped our exemptions and expect a very breakeven year in 2007.

I have 2 things that boggle my mind. A rather well off friend who bragged of $10k tax refund. OMG - what a waste to give that money to the government!!!!!! & also I have a lot of mom friends who wish they could stay home. So I always ask what if their spouse could scrounge another $200-$500/month, which they usually can with tax savings with the child tax credit and lowering the tax bracket when going down to 1-income, etc., if they could stay home. Often the answer is yes. I have actually helped a few friends make the leap to SAHM once they understood their taxes a little better. BUT most of the time the answer is, "huh? But then I would have to give up my tax refund????" Oy vey...

Most of the time they rather have a big windfall than a more steady income. But granted they don't have the discipline to save, maybe they are better off...

[MonkeyMama]

Re: Would you rather have a larger paycheck or a larger tax refund?

Possibly. But then the question becomes, "What do they do with the tax refund?"

Ans: Spend it.

That's the conundrum, they never save the refund either. ???