Passive Income

I hate getting a tax refund. Each year, I try to be as close to tax-neutral as possible. Basically, since I am a salaried employee, I try and determine the exact exemptions I need to take to end the calendar year “all square”. Most financial planners, bankers, brokers and advisers will tell you that this is the best approach to take.

If you get a tax refund each year you are simply giving the government an interest-free loan. As of March, the average refund received was approximately $2,700 (mine is actually larger than that). Best practices suggest that you reduce the amount of money that is withheld from your paycheck and invest this amount in an interest-bearing account.

That last part always makes me laugh. I am puzzled how the experts determine what amount you should invest. Most Americans, myself included, have an extremely hard time NOT spending every dime that hits their wallets. My wife and I have a financial plan, and we are pretty consistent in following it to within 10 – 15%. The problem always occurs when our friend “Life” shows up.

Last month, “Life” decided that both cars needed to break down (-$300). “Life” also decided that both of our dogs would get sick – the Scotty’s bill came to $80 while the Silky’s bill came to over $300. Life’s friend “Heartache”, decided that our frig had lived long enough, so we had to replace that as well. Luckily we purchase “home warranty insurance” each year so they were able to get us a brand new frig for around $300. Most people say that Home Warranty Insurance is a waste of money, but we have saved hundreds, if not thousands, of dollars over the past three years with it.

The total damage of Life’s little adventure last month was close to $1,000. This really put a damper on our savings account. Then along comes tax season. I do have a pretty strong financial and accounting background. I have passed the CPA exam and should be getting my license very soon. Each year, my refund ranges from $17 to around $250, which I consider to be pretty good management. In the middle of 2007, I switched jobs and really forgot to inform our payroll department to withhold less from each paycheck. I was so busy trying to lead the company, I forgot to follow up with my deductions.

As a result, this year, I will get a refund of approximately $3,200. Additionally, I will get $1500 for simply filing my taxes this year. While I know this is not NORMALLY a good thing, this year, due to Life’s Slap in the Face, I am pretty happy I gave the government a loan. Now just give me my money back!

How much are you getting back this year? How do you plan your taxes each year? I would love to hear from you.

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