Why You Should Aim to Break Even on Your Taxes

Some people brag about how big of a refund they get on their taxes, or that they use the refund to do trips or to save money. Rarely do they save money; usually it’s trips. They act like this is a good thing or they look forward to it. And I don’t really think getting a large refund is something you should strive for. I mean, you’re essentially giving the government an interest-free loan that you don’t get back until around April the next year. Personally, I’m not a big fan of not earning interest on my money, especially when the person that’s benefiting from that is the government.

Now on the other side, you probably don’t want to make a big payment into the IRS each year. Yes, you can put that money into a checking or savings account, get a little bit of interest on it, and put it in your own pocket. However, from what I’ve seen, most of the people that try this strategy end up spending that money that isn’t theirs. It’s the government’s money, but they’re spending their taxes before tax time. And then when it comes to tax time, they file an extension and then guess what? You’re paying interest that accrues daily on whatever you owe the government past April 15th. And that interest that you’re paying for them is 8% a year, accruing every day. I always tell people, don’t feel comfortable about how little debt you have until the interest rate on that debt is less than 6%. And you’re essentially owing the government taxes at 8%. That’s a dangerous game.

So ideally, you want to break even every year. When tax time comes, you want to owe as little as possible and get back as little as possible. It takes a little bit of work to figure out how to do that. Sometimes, because of how W-2 income works, you can only adjust your dependents. You can’t really change anything else. But if you’re getting a big refund each year, you can increase the amount of dependents so you’re not paying as much money to taxes. If you’re owing a lot of money, you can lower how many dependents you have, or talk to your payroll about possibly increasing the amount of withholding you’re doing. But the goal every year should be to come as close to breaking even as you can.