Why I’m Happy To Loan My Tax Refund to the Government

Uncle Sam empty bank (due to tax refunds!)“If you get a tax refund, you just gave the government an interest-free loan!” I seriously can’t count how many times I’ve heard people say some variation of that phrase.  You’ve heard it, too (or maybe you’re the one that said it to me).  It’s technically true. But obviously people who say this really haven’t run any math on that to see how insignificant the interest can be nor have they considered any other implications.

Let’s examine the impact that going a year without my refund had on my finances this year.  I received a tax refund of $900 for 2010.  Assuming that I placed an equal portion of this each month (which is $75) into a savings account each month and my deposits earned a generous 1.5% APY (note: I currently get 1.0%  on ING), I would have earned a whopping $7 of interest by the end of the year (which is, ahem, taxable).  Geez, looks like one less burrito at Chipotle this year.

Math aside, you could also point out that you had to wait to get the rest of your money, interest or not.  The $900 is sorta a big deal to me (it’s currently almost a full month’s pay).  But what if I screwed up my withholding and I suddenly owed $900 in taxes?  This can easily happen if you get a big pay raise mid-year or change your allowances on your W-4.  As Ramit Sethi points out, many who would owe this amount of money at tax time wouldn’t have the cash to pay their taxes.  This would definitely put a strain on my finances.  There’s potential to create a real mess with the IRS and that’s far more of a pain than whatever reward that would  .

Moving on from interest and waiting, it’s just plain fun to get a bunch of cash all of a sudden that you didn’t really have to do anything more to earn.  I don’t plan ahead for when I get my tax refund, and I don’t know how much it’s going to be.  But when I get the refund, I treat it a bit like a reward (while still being careful how I save/spend it).  This lump sum is much more beneficial to me.  I obviously survived the year without that $900.  If that $900 had been spread over every paycheck, that would’ve only been an extra $35.  I would’ve easily squandered that on one or two meals at a restaurant.  But by getting the refund as a single, large payment, I can do something much more significant with it.

This year, my refund (after I added to my emergency fund) covered my airfare to my upcoming trip to Spain.  There’s not any other easy way I could have come up with this amount of cash by trying to save or skimp throughout the year.

While it is fun to get one, I’m definitely not suggesting you just squander it.  I really like knowing that I have money that I can just put into savings or other places that I can’t always afford.

Perhaps there’s something meaningful that you pay for, too.  You could use your refund to tackle credit card debt.  Throwing a few thousand on that fire could go a long way.  Either way, I hope the tax refund haters out there will get over all the “free government loan” fussing.

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photo by: Infrogmation

Five Arguments For Self-Preparing with Tax Software

I’ve prepared and filed my taxes without the help of an accountant since I was 18 years old.  At first, I was intimidated into thinking that it was a complicated process and that I needed outside help to figure it out.  Then, I was lured in by Tax Slayer web-based tax preparation software (note: I am not paid a dime by Tax Slayer, I’m just a happy user).  I’ve been using it for more than five years now, and I keep going back. In fact, many people are doing the same with a variety of e-filing software. For tax returns filed in 2010, about 25% of returns were self-prepared and e-filed.  This is an 8% increase from 2009.

If you don’t have an incredibly-complicated tax return, here’s why you should prepare your return yourself:

1.  It’s intuitive and much easier than filing by hand.  With all the proper documents in hand, it’s basically as simple as reading instructions on a screen.  All the calculations are done automatically.  The software picks up on errors, too.  There are different “wizards” that help find areas that might lead to different deductions or credits.  I rarely run into problems, but when I do, a simple search through the help section or IRS website have given me the answers quickly.

2.  It’s cheap.  On Tax Slayer, you can e-file a federal and one state return for $15! That’s an amazing bargain to me.  Paying an accountant costs about $200, on average. There’s also more expensive tax software, like Turbo Tax, but you might get the same results with the cheaper Tax Slayer.  This year, I tested to see how Tax Slayer stacks up against Turbo Tax by preparing and comparing my refund results on each website.  Turbo Tax does have some extra bells and whistles that are convenient but not necessities.  In the end, I got the exact same refund amounts on both sites. The big difference: Tax Slayer cost $20 for federal and two state returns, while Turbo Tax wanted $109.  Obviously, I filed with Tax Slayer.

3.  You can produce the same results as an accountant.  So you aren’t a professional when it comes to taxes? That may not matter.  J.D. at Get Rich Slowly uses an accountant, but some readers question if this is necessary.

The general rule of thumb is the more complicated the return, the more beneficial an accountant might be.  For the younger crowd that doesn’t own a house or any investments, the process should be really straightforward as you probably only need to file at 1040EZ. If you don’t have many deductions, taking the standard deduction, which is $5,700 when filing as single for 2010, is definitely preferred.  If your deductions are less than this, there’s no need to itemize.  This can cut out a lot of rules and time spend looking at receipts and other records. When you don’t have many complicated tax situations like capital gains or self-employment, a tax return is simple with little room for improvement with an accountant.

4.  You can start (and basically finish) a return for free.  If you don’t like the software, you owe nothing.  If I haven’t convinced you yet, you can give Tax Slayer a shot without obligation. I tried Turbo Tax without paying this year, but didn’t end up filing with Turbo Tax after the results were no better than the cheaper Tax Slayer.  Give it a try, and if it’s not for you, you won’t be out anything more than a little bit of your time.

5.  You get a real sense for how taxes work and where you can find deductions.  Many people that I’ve talked into doing that own taxes really had no idea what different factors determine what you owe.  They had no idea how taxes were calculated and what types of deductions could be taken.  While I’m not an expert on tax code by any means, I’m far more knowledgeable that I was before I did my own tax returns.  That helps with decisions I make during that year that will have tax implications in the future.

I have to admit, since I haven’t had an accountant prepare my taxes in recent years, I have no independent verification that I’m receiving all the deductions and credits I’m entitled to.  I’ve pondered switching to an accountant, especially when I receive income from being self-employed this year.  Things can also get a little confusing when capital gains, tax lots, and dividends from investments come into the picture.  Maybe next year I’ll hire an accountant AND attempt my return on Tax Slayer as an experiment.

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photo by: jekert gwapo