Filed Away
Another tax season has come and gone for the Canoe Dock household. I filed a couple of weeks ago and the refund check cleared this past Friday. I always get a little paranoid when I click the submit button and worry that I’ve goofed something up. Our Next Life had a great post about emotional responses to taxes.
We Got a Refund
The good news is that we were able to claim some of the daycare expenses since my wife worked some in 2015. This helped put a little more back in our pockets. I thought about claiming my home office since I work from home, but thought better of it since I’ve read that it can be a red flag for audits and since I occasionally goof off and work on personal projects in here.
The bad news (and I used to think this was good news) is that we got a large refund of approx. $6500 from Federal and $1700 from State. In the past, we would have been overjoyed to receive what was perceived to be a windfall and would have immediately made plans for a vacation or project. Now, I have a much better understanding that I have overpaid on my taxes and could have put the free cash flow to much better use and potentially have reduced some interest accrual.
This year, I anticipated the refund and already had a plan for the money.
How We Used the Refund
First and foremost, I allocated 70% of it to debt reduction and knocked out the last student loan with a $5500 payment! Boom, no more student debt. That loan has been with my wife since 2001 from her first degree. It was from a larger private school so it hung around longer than her second degree which we paid off a couple of years ago. This frees up $125/month in cash flow.
Second, we put around $1000 toward furniture in the living room. This is something that my wife has been wanting to do for a long time (have at least one “adult” room in the house) and it did a lot for mental health to complete the room. I console myself with the fact that the win was bigger than the extra expense.
Finally, we tucked away around $1500 into the savings account in anticipation of our beach trip in April. I don’t plan on spending that much on the trip since the housing is already paid and we only need to worry about driving, meals, and tourism. It’s very nice to know that the trip expenses are covered. The leftover $200 went to the investment account.
What Needs to Change
Obviously, I’ve learned a lot about personal finance in the last year and I believe that I need to optimize my W-4 to reduce the amount of taxes being withheld. There shouldn’t be a huge difference in income this year, so I plan to adjust it based on that projection so that we receive little to no refund. I wouldn’t even mind if I had to pay a little.
For now, I’m looking forward to the extra positive cash flow each month as well as getting the garden set. I can almost taste the fresh tomatoes!
Cheers
-cb3
That is a huge refund. We always try to cut it close to the edge and pay just a little with our tax filing. For 2015 I only owed $98 Fed and $64 State so we did very well. We retired early and my short side hustle income was only $40K. I did claim on my W4 Single/0 because with no mortgage interest we have to file standard deduction. It isn’t always easy to balance having enough withheld without having tax filing extremes of refund or owe. Better to be surprised with a big refund than a big tax debt to come up with. Good luck on your withholding adjustments.
Yeah, it was pretty big. In a way, it was good because I was immediately able to knock out a debt but it’s definitely a crutch we don’t need anymore. I’d rather be able to take advantage of compounding and send that extra cash to the investment account. Even though I’m a little nervous about how it will all balance out, I know it’s the right move. Like I was telling my wife, it’s time we grow up and do it the ‘right’ way.
Wow that’s a big refund! Still need to do our taxes, just waiting for a few final paperwork to get in.
Luckily, most of our paperwork was in and I had time to sit down and work on it. I have a feeling next year may be a bit more complicated.
Thanks for the mention! Don’t beat yourself up about overwithholding — if you’d investing that money instead, you wouldn’t have made much money in the past year’s lackluster markets anyway. 🙂 But huge congrats on knocking out that student loan. Wohoo!
Ain’t that the truth. I think we’re just getting back to even on the year as far as investments goes. Besides, knocking out that loan increases net worth and free cash flow. Win!