Comments

You must log in or register to comment.

keepthetips t1_j52qvbh wrote

Hello and welcome to r/LifeProTips!

Please help us decide if this post is a good fit for the subreddit by up or downvoting this comment.

If you think that this is great advice to improve your life, please upvote. If you think this doesn't help you in any way, please downvote. If you don't care, leave it for the others to decide.

1

Comfortable-Policy70 t1_j52sgtb wrote

This is common, frequently posted tip but the most important point is rarely stressed enough: if you update your W9 so that you owe a small amount, you must have a savings or investment account that pays interest and you must save at least as much as you would pay in the excess withholding. For some people, the extra money every paycheck makes sense. For others, the forced and inaccessible "savings" that a refund provides is better.

45

atynre OP t1_j52shgi wrote

The strategy is perfectly lawful. Honestly if you could pay exactly what you owe and get a $0 refund then that is ideal, but near impossible to pull off perfectly. I am trying to convey that it is better to owe a little than it is to get a refund because you could be using that money throughout the year. According to the IRS:

>To avoid a penalty, pay your correct estimated taxes on time... You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:
>
>Your filed tax return shows you owe less than $1,000 or
>
>You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

2

ryjohn429 t1_j52vojj wrote

I have a friend who is constantly broke and trying to figure out how to stretch his groceries until next payday. But every year he gets a $6k tax refund. He can't seem to wrap his head around the fact that he's loaning the government $500/mo, interest free, and has to wait the whole year to get it back. Foolish.

I've set mine up so I pretty much break even every year. Most years I get a small refund, this year I'll probably owe a bit.

5

Disavowed_Rogue t1_j52wf3u wrote

This is good advice. It mostly works out for me, but this year I reported my crypto and ended up getting a refund. I'll take it to offset the loss :)

0

Send_Your_Noods_plz t1_j52wu6y wrote

This is financially the best decision because you can invest the money each check... if you actually do that. If you are the type of person who looks at their bank before deciding they can go out that week to dinner, or get fast food on a whim and never seem to really be saving money, it is kind of a forced savings account that you can't touch. It's not just a 0% loan you gave to the government, if you save the money you would have spent otherwise that's your interest. Me personally 50$ a paycheck missing isn't hurting, it forces me to tighten my belt. What I do enjoy is getting 2300 lump sum. I'd of spent it on other things throughout the year, but now I can buy bigger things like a vacation.

3

Send_Your_Noods_plz t1_j52x954 wrote

Yeah, 50 extra on your paycheck means you can go out 1 night. Most people are not taking that money and investing for essentially pennies over the course of a year. If you make enough that it's not just pennies of interest this makes sense but for a lot of people out there were talking a hundred or two at best

10

nekogatonyan t1_j52zs58 wrote

I tried to do this by following the IRS calculator on their website, and my employer's accountant called me and said it didn't make sense. So they set my withholding to 0. Oh, well.

0

Jaded_Prompt_15 t1_j5308d7 wrote

You can even claim "exempt" from withholdings for social security...

Every year, lots of idiots find that out. And they assume it means they're somehow exempt from it. Like, there's just a secret opt-out that no one knows about.

So they change it, and because they think it's a secret life hack, they don't tell people they found it.

Then Social Security calls their employer, locks them at a high deduction, and give them a giant debt.

Just pay taxes as you earn money, it's not worth the hassle

6

ryjohn429 t1_j535tuv wrote

He makes the same salary I do at the same job, has the same number of kids and is the same age. He's broke because of a two-pack-a-day smoking habit, a case of beer a night, and lots of other poor decisions.

5

Illustrious-Gas-9766 t1_j53ttlw wrote

I try to go a little bit the other way, so I get a little back between state and federal taxes.

April can be a tough month to come up with extra to pay taxes.

For me, it's easier to overpay a little so that when taxes come along I get some back.

0