I hope there’s no confusion because of the title, but just in case let me explain the issue up front. Many people overpay their taxes in their paycheck, whether it’s weekly or bi-weekly. They do this for one of two reasons usually. The first is worrying about not paying enough. The second is because they want to get a nice refund when their taxes are done so that they can use that boost in funds to buy stuff, go on vacation, pay some bills, etc.

Paper Money
Roger Walch via Compfight

The truth of the matter is that it’s not only possibly a better thing to pay only what’s owed and deal with either a small refund or payment or pay even less in taxes and do something with that extra money now. What am I talking about?

When you pay more to the government than what you owe, they get to use your money to build more money for themselves. Whereas there’s nothing wrong with that, since our government could certainly use the cash, you could be doing the same thing with that money if that’s what you want to do. Or you could be using that money for other things now such as food, entertainment, or even savings. Not in a bank, since that 0.5% a year you’d probably make on a traditional savings account is basically worthless for most of us, but popping it into an IRA at 3.5% or other types of personal funding not only earns you cash, but it’s not taxable until you cash it in. So, you could keep rolling it over and making money and not really have to pay any extra taxes on it… depending on how much of it you put away.

Something else to consider is paying the government less in taxes in the moment and turning around to use it to pay down debt. I’m not going to lie, the first time you think about it you’ll be scared by the fact that you might end up owing the federal government money. However, you have time to pay them what they’re owed, and even if you have to go on a payment plan with the Fed their interest rate, along with penalties, is way lower than that 14% or 29.5% you’re paying on your credit card, normally around 7%. Still, it’s dicey to do it if you’re not prepared, so always do a budget and plan payments accordingly; if you can pay something off or almost off before your tax bill is due, how sweet would that be?

Overall, the major decision is whether you want the government to be using your money or if you’d like to use your money. Some people like that safety net of getting back that extra tax money; there’s nothing wrong with that. But if you think you can be a good money manager, or can find someone who can help you become one, it’s not a bad idea to think about using your money in other ways.

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