I just finished filing my taxes and as you can see from the title of this post: I owe money this year. But wait… did I say I’m happy that I owe money? YES. I am happy and that was NOT a typo.
Allow me to explain so that you don’t think I’m completely crazy here lol. First of all, I do owe money but I don’t owe thousands of dollars or anything crazy. I owe $181 for federal taxes and I’m actually getting a really small refund for state taxes.
Back to why I’m happy about owing money to the government…
Up until last year, I would always get tax refunds and I would be SO excited about them. (Yes, back when I was normal) It wasn’t until I learned more about taxes and how they worked that I realized I didn’t want refunds anymore.
Unfortunately, we don’t learn about taxes in school and a lot of us just learn to claim 0 on our W-4 allowances and hope for a nice refund when it comes time to file taxes. I was one of those people! I claimed 0, I got some nice tax credits for being in college, and I wasn’t making a lot of money since I was just working part time. This was a recipe for a pretty nice tax refund year after year.
I was also one of those people that thought getting a refund meant getting extra money back that never existed before. It was this magical little lump sum of money that always came, which naturally I never questioned.
One day I learned that it wasn’t extra money, it was just my hard earned money that the government had been holding onto all year. Say whaaaaaat?!?! I know my mind was blown too.
How much you pay in taxes is based on your tax bracket. A tax bracket is basically a range of incomes that the government taxes at a particular rate. Because the U.S. tax code has seven tax brackets, it’s possible for more than one tax rate to apply to your income. If you want to get a better understanding for how tax brackets work, check out this article.
So that determines how much you pay in taxes, now how do you pay for these taxes? When you started at your job, you probably filled out a W-4 Form to let your employer know how much money to withhold from each paycheck for taxes. You do this by specifying the amount of “allowances” you would like to claim. The lower the number, the more money your employer will deduct from your paychecks for taxes. Therefore the higher the number, the less.
How many allowances you claim depends on you and your situation. I am going to share with you what I do for my own situation, but full disclosure: everyone’s situation is different and I am not advising you to do exactly what I do. I am NOT a tax professional. You should do what’s best for your situation and if you have any doubts, you should consult your tax professional.
It’s also important to note that if you owe too much at the end of the year because you claimed too many allowances, you can face a penalty on top of what you’ll owe in taxes. To learn more about tax allowances, I found this article that should help you get a better understanding of how they work.
Back to the fun stuff… So your tax bracket(s) determines how much you owe in taxes and every paycheck taxes are withheld depending on your allowances. As a result, you pay your taxes as you go as opposed to paying them all at once at the end of the year.
If you get a tax refund it doesn’t mean you got extra money, it means that too much money was withheld from your paychecks over the year and now the government needs to give you your money back.
You basically lent money to the government and they did not pay you any interest for doing so.
Once I understood how this all worked, I realized I didn’t want tax refunds anymore. I wanted to pay whatever amount of taxes I owed throughout the year and not anything extra. Unfortunately, there isn’t an exact science or formula to know exactly how much to withhold every check to make it so that you don’t owe or get a refund back.
My goal now is to get as close to that even mark as possible. I told you that’d I’d share with you what I am doing for myself now. I used to claim 0 (remember that’s when the most money gets withheld) and I changed that allowance to 2. I get taxed less throughout the year and I don’t get a refund, but now I owe at the end of the year.
As I mentioned earlier, this year I ended up owing $181 and that is why I’m happy that I owed taxes. I’m happy because although owing isn’t fun, it’s an amount that is close enough to 0 for me which means I didn’t give the government any extra money throughout the year.
This strategy works well for me, but it doesn’t mean that it’s for everyone. If you’re good at saving and having money set aside in case you do end up owing, then claiming a little higher of an allowance to keep more money throughout the year may work well for you.
On the other hand, if it’s hard for you to save money then claiming 0 and getting a refund at the end of the year may work better for you. It depends on your spending/saving habits, your situation and most importantly what you’re most comfortable with.
I personally would rather keep more money and have that money work for me (even if it’s just putting it in my online savings account) than let the government have it all year without me getting anything in return for it. However, I’m aware of what this means come tax time and I’m okay with whatever the end number may be.
If you typically get refunds and like that, there’s nothing wrong with that! Just remember that it’s not “extra” money, it’s the money you worked for all year long. Do something good with that cash once it arrives. If you’re wondering what some good ways to use your refund are, I go over some here.
That’s all I have today! Happy tax season, y’all. <3
Nothing on this blog should be considered personal actionable advice, research, or an invitation to buy or sell any securities. Consider all risks before investing, including the loss of your hard earned money. Vee is an Investment Advisor for Warren Street Wealth Advisors, this blog reflects her personal views, and not that of Warren Street.