If you read last week’s post, you already know why Johnny and I do our own taxes. We also mentioned that we claim zero tax exemptions. And today we’ll explain why we’d do such an unthinkable thing.
Last week, we got our final W2 in the mail, and Johnny could barely wait for dinner to be over before he went to work on filing our taxes. Part of his giddiness stems from knowing that because we claimed zero exemptions, we’ve got a hefty tax return coming our way.
Of course, the government isn’t actually giving us money. The money was ours all along. And if we’d really wanted it, we could have claimed some exemptions and gotten that money throughout last year. So why in the world wouldn’t we just do it that way?
For us, claiming zero exemptions is a surefire way to save up some extra money throughout the year. Let’s say our average tax refund with zero exemptions is $3,000. If we chose to claim exemptions, that’d be an extra $250/month in our pockets over the course of the year. That money in $250 increments would be so much easier to spend on this and that. But getting $3,000 in a lump sum is much easier to do something productive with — like funding an emergency fund, contributing to a Roth IRA, or putting toward a car fund.
The Why Not
Oftentimes, the argument against claiming zero exemptions is this: How silly to loan the government our money that we could invest throughout the year! So let’s look at that $3,000 return again. If we deposited $250/month into an account that gave us a 10% return over the course of a year, we’d earn $167 total in interest… not super compelling. Of course, that’s assumed we actually had the willpower to save that extra money and not just spend it.
When we get our return this year, we’re dumping almost all of it into a 529. Would we have used it as usefully if we’d gotten it in small increments throughout last year? Doubtful.
The only time we wouldn’t claim zero exemptions and opt for the money throughout the year is if we were trying to put every extra cent toward paying off debt. Then it would make a difference to get that money up front. But if the argument is that you don’t want to loan the money to the government BECAUSE IT’S MINE? Eh, we’ll pass.
Once again, it’s all about money psychology. And in this case, that money is much more likely to be put to good use if we get it in a lump sum at the beginning of the following year. We’re not expecting it or relying on it, so it can immediately go toward something useful.
Those are our thoughts. Now let’s hear yours. Why do you claim or not claim exemptions?