DiLLaGii wrote:Fat_Bulldog wrote:JackofDiamonds wrote:Big tax refunds are not a good thing...while they are obviously better than owing the government, you've done yourself a financial disservice any year that you receive a substantial check back. A tax refund is not a bonus check, it's your own money that you overpaid the government all year, without earning a penny of interest. Change your withholdings, put that money back in your pocket on a monthly basis, and save it yourself. The government doesn't need a 16 month, interest free loan from you.
Increase your withholdings, increase your monthly cash flow, increase your financial stability!
*speak with a tax advisor or CPA about the correct number of withholdings for your situation!
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Did you even understand what JoD just said?
Sorry if I assumed too much, I think people tend to expect others to understand the basics of their field even when there is no grounds to assume so. I find particle physics interesting, but Arthur Dent and Jim are at an entirely different level of understanding. While personal finance is not abstract physics theories, it's still not taught in schools.
Here's a crash course on your paycheck:
You receive a gross sum of money every paycheck based on your annual salary divided by the amount of times you get paid every year. Let's use an income of $60k a year for easy math. If you were paid monthly, your gross income would be 5k, semi-monthly would be 2.5k, bi-weekly 2307. From that number, we have multiple deductions. Some are pre-tax (medical premiums, 401k contributions, etc.) and some are after-tax (elected benefits like extra life insurance, etc.). So we have a semi-monthly check of $2500 and we contribute 10% to our 401k and our other pre-tax deductions sum up to $250, our check would be $2000 minus taxes. We can elect on a W4 how many withholdings we want to take to change the amount of taxes you pay each pay-period. With a 60,000 salary, a single individual with 0 withholdings would pay 25% of their check to federal taxes (and a varying degree to your state taxes, whatever they may be for you); however, the average individual also has several write offs (mortgage interest, kiddies, etc.) and didn't need to pay 25% of each check.
When you file your tax return, you are calculating how much you paid in taxes vs. how much you should have paid in taxes considering your tax credits/deductions/write-offs (whatever you want to call them). That difference, positive or negative, is what you end up paying or receiving from the Government. If you paid more than you needed to over the year, they just give it back to you. Essentially, they took more money than they were supposed to, combined it with everyone else's extra taxes, earned interest on it, then returned the principle to you. You can change your withholdings to get closer to a net 0 tax return. That means your paycheck will be bigger every month than it is now (if you are getting a refund), and you can invest those dollars to your own benefit.
