Tomorrow is tax day, the last day that you have to get your taxes in at the post office and send them to the IRS. There will be long lines and a good chance that the USPS will stay open late to accomodate people that cannot even make that date.
I mean no offence to any of my readers but if you actually are in the position that you have to participate in this yearly ritual tomorrow, I want you to go somewhere right afterwards and sit down and do a little self examination because, you sir or madam do not have your shit together.
But thats not what this post is about. This post is about one of the dumbest pieces of tax advice I have ever heard. The problem is that I hear it over and over again year after year from very famous people. I hear it on NPR. I see it on CNBC. I read it on Financial Blogs. Worse yet, I actually know two people that acted on this advice and it ended up costing them a lot of money.
The question is whether you should have the government withold the max and owe you money at the end of the year or have the government withold the minimum possible – or even claim exempt – and pay them at the end of the year.
The financial advice is almost always the same: Do not let the government hold on to your money all year because they will earn interest on it. If you hold onto it, you will earn interest on it.
The math is correct. So why do I think this is bad advice? Simple: You won’t follow it.
You will have them withhold the minimum, but during the year 99.999999999% of you will not put that money into a savings account. You will spend it.
Think about it. You know I am right. Do you really want to keep track of your tax witholding yourself? How about the overall feeling at the end of the fiscal year, do you wanna get a nice fat direct deposit in your account or do you really want to write out a check?
Now lets say that you do manage to execute this perfectly and have all the money set aside in April to pay the government: how much interest did you gain for your effort.
Average tax refund is $3000. That makes the interest from a typical savings account about $2.50 a month.
My coffee costs more than that every morning.
So yeah. I usually do not comment directly on tax or investment strategies, but this one is pretty safe: get a check at the end of the year rather than write one. You will feel a whole lot better.