How We Avoided A Smaller Tax Refund (And What We’re Doing With It)

Have you done your 2018 taxes yet?  Are you one of the unfortunate people who are seeing a smaller tax refund this year?  If you are, I hope that it won’t impact your finances in a negative way.  Thankfully, we were able to avoid a smaller tax refund this year.

tax refund checklist

How We Avoided A Smaller Tax Refund

When we got our tax forms back, we were happy to see that we’re getting a little more back than last year.  While many people think getting any sort of refund is bad thing, I actually welcome a refund.  We don’t count on the refund.  For us, it’s just nice to have money that isn’t a temptation to spend during the year.  The removal of that temptation is worth the small interest we’re foregoing.

So, how did we avoid a smaller refund? There were two main reasons.

We Ignore Our Kids

Wait! What? You don’t pay attention to your kids? Scandalous, right?

Well, that’s not true.  We give our kids lots and lots of attention.  They’re awesome.

But, where we ignore them is how it comes to our withholding.  My W-2 indicates that we have just two allowances.  My employer withholds as if it’s just my wife and I.

That’s the thing about withholding.  You can put anything you want on your W-2.  It doesn’t impact the tax you end up having to pay.  All it does is change what your employer sets aside.  At the end of the year, you’ll end up with the same amount of tax paid on your tax forms.

So, our strategy basically means that my employer deducts tax as if it was just the two of us.  If we included our kids in our withholding, each paycheck would have been bigger.  And, my tax return would have been smaller.

Most people claim the actual number of dependents they have on their W-2.  We didn’t, and it helped us out when it comes to our refund amount.

tax refund
We did not have a smaller tax refund this year, largely by design.

Our Deductions Were Timed Properly

Up until this past year, we always itemized our deduction.  Between state tax, mortgage interest, property tax, and chartitable deductions, we always deducted a higher amount than the standard deduction.

With the new tax law, the standard deduction basically doubled.  No way would we have come anywhere near that amount.

But, the thing is that we weren’t going to be itemizing any longer anyway.  It just so happened that our gap was getting smaller and smaller.  This happened for two reasons:

  • The standard deduction amount increased – Every year they had been raising the standard deduction amount by a few hundred bucks.
  • Our deductions were shrinking.  Our mortgage interest had declined as we’ve paid more and more of our loan.  We’d actually been working to maximize our deductions by timing some payments.

People who were claiming a few thousand dollars more than the standard deduction still no longer got to claim it.  That has a meaningful impact.  But, for us, who were only a thousand dollars or so over during the previous tax season, it didn’t hurt us.

What We’re Doing With Our Refund This Year

So, now that we’re one of the lucky people who aren’t seeing their refund shrink, the question is: What next?  How are we spending it?

We have our refund allocated to a few different categories.   Some of these need little or no explanation.

  • Car Fund And Repairs
  • Home Repairs
  • Kids Sports, Camps, and Activities
  • Christmas Gift Fund
  • Birthday Gift Fund
  • Camping Trips
  • Family Spring Break Trip
  • Couples Trip – My wife and I went to Cancun a couple of years ago.  We’d like to go again soon while the kids are young and easier to watch.
  • Clock Repair – I have an antique clock in need of repair.  I have put this on the list for several years but it usually gets bumped.  Hopefully I can get this repair done this year.
  • Mower / Snowblower Maintenance – One or the other of these machines seems to need repair every year.

That’s it.  That’s how we plan to spend our money on our refund this year.  Honestly, this is pretty similar to what we have allocated in the past.  In fact, I have a spreadsheet with a ‘Tax Refund’ tab.  Each year, I open it up and use previous budgets as the starting point for the allocations.

4 thoughts on “How We Avoided A Smaller Tax Refund (And What We’re Doing With It)”

  1. I have to admit, even though it is a math challenged concept, I always enjoyed getting a large refund. We never spent it, just invested it, but it felt so much better than the few times we’ve had to write the IRS a check! I missed that about quarterly payments I now make on my part time self employed income. The “return” is just applied to the next quarterly payment so there is never an unexpected check.

  2. I am totally with you on the refund. Human psychology is sometimes underrated when it comes to personal finance and investing.

    The refund is forced savings and it definitely feels good to get one. Somehow I have a feeling that 99% of the folks who say “you are missing out on the interest” don’t actually bother transferring the paltry $5 a month to their savings/investment account anyway.

    But I get a small windfall in the spring and they don’t. I hope I don’t offend anyone with this analogy, but it actually reminds me of a few times when I sit next to someone in the cafeteria who’s eating some nasty “diet food” leftovers that taste like cardboard. Not sure if they are trying to save money or calories or both. Meanwhile, I pull out the tasty burrito I just picked up from Chipotle (while still managing to stay in shape, both physical and financial). I feel a little bad for them.

    • That analogy cracks me up. And it makes me want to go to Chipotle. Actually, we prefer Qdoba nowadays so I’d probably go there for a tasty burrito.

      I’ve always looked at it that if your theoretical interest gain is $50 per year, then all it takes is one spend of $50 and you’ve erased all of your potential gains. Maybe back in the day when interest rates were a lot higher there was a case for it. I also suppose if you don’t use interest rates, but use stock market gains, you could have a case for it, but investing is risky in and of itself.

  3. I actually prefer owing taxes at the end of the year. This means I got some extra and had the chance to earn a bit of interest off of the money. However, it is always nice getting a fat and juicy refund when it comes!!

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