by Barry Tadmore

Created on: April 15, 2008   Last Updated: December 09, 2010

Tax withholding is a very difficult science. Most people don't worry much about it, choose married and zero withholdings or single and zero withholdings. They will get a big tax return, and that will seem like bonus money. Everyone loves a big tax return, right? Not me!

Tax refunds are a bad thing. Don't get me wrong. Last year I got $4,600 back on my taxes, and I was loving it. However, I quickly realized that I was giving the IRS an interest free loan! And even worse, I was happy about it. Sure, it's an easy way to save money since you didn't even realize it was there. But there are so many better options to save money.

Many people choose to file their taxes with 0 exemptions. What this does is withhold the most taxes possible. By doing this, you are contributing your money to the IRS on a 0% interest loan. When I received my refund, I realized I could be getting a lot better than ZERO percent on my money, so I asked my accountant if he could provide some insight on how many exemptions I should claim on my paychecks. As a great accountant, he gave me the perfect tool. He gave me a spreadsheet straight from the IRS that shows the amount of money I would have deducted for federal taxes depending on how much money I made and how many exemptions I claimed. I realized that claiming "married and five" was the best option for me. This gives me an extra $95 per pay check, but is still putting enough taxes away for about a $500 return. I made it $500 because something might change and I want to give myself a cushion so I won't end up owing the government any money.

Now, many people would spend that money as if there were no problems, but that is a mistake. If you usually claim married and zero, try claiming married and five and putting the difference into a savings account. I've set up an automatic deposit for every paycheck to go into an online bank account where I current earn 5%. I did the math, and I will end up earning around $40 in interest. Sure, it's not too much, but would you rather have a $4,600 tax return or a $4,640 tax return.

So it's simple...tax refunds are bad because you are giving money away! If someone offered you a 0% loan, you would take it right? Well that's what the government is doing by taking extra taxes. But you don't have to let them! Adjust your withholdings and start putting your money to work for you!

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