It’s that time of year again: time to file income tax returns. N.C. State University economist Mike Walden gives two suggestions.
“Well, first, although we all like to get money back from the government, actually that’s a bad idea. You should arrange your withholdings that you get such that you have enough that you pay what you owe, but you get very little back. The reason is that when you over-withhold and you get a big check back when you file, you’ve given the government an interest free loan. Now some people say, ‘Well I need to do this, because that’s the way I save money.’ There are other ways to force yourself to save. You can get with your employer and have money automatically deducted from your paycheck going into an account that pays interest. So you typically don’t want to give the government an interest free loan.
“The second tip I would give people is know the difference between a tax deduction and a tax credit. A dollar of a tax deduction doesn’t save you a dollar of taxes. It saves you based on what your tax bracket is. So, if you’re in the 30 percent tax bracket, every dollar saves you 30 cents in tax, whereas a tax credit does save you 100 percent with a credit. So, a dollar of a tax credit actually saves you a dollar in taxes. Therefore, tax credits are much more valuable to have.”Category: Economic Perspective