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It's not necessarily that simple. I would say that for most Americans who are cash poor, they intentionally do not optimize their taxes to break even, but rath
by burlesona 8y ago
It's not necessarily that simple.
I would say that for most Americans who are cash poor, they intentionally do not optimize their taxes to break even, but rather to ensure they never end up owing the government money at the end of the year.
The rationale for this is pretty simple. Even if you're poor, $50 a month in extra income isn't going to make or break you, but an unexpected bill for $600 in April can really mess you up. On the other hand, just going with max withholdings and discovering in April that you get $600 back from the government is a nice bonus.
It's not the "optimal" decision from a finance perspective, but for a lot of people it works better in real life.
- usaar333 8y agoIt is still better to save an extra $50 in your own bank account than let the government pay you 0% interest in it.
- astura 8y agoNot if you'd otherwise spend the extra $50 each month.
- burlesona 8y agoBut not when - instead of being some arbitrary number like $50 - it’s a vague and unknown future liability. Most people end up with some mix of side income and tax breaks that are hard to predict in advance. If you’re wealthy and you’re off by $500, so what. But if you’re poor and you were off by $500, it can be devastating. So again, I think it’s rational behavior for some whose life is optimized around avoiding cash flow surprises than optimized amount maximizing return on capital.