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Let Uncle Sam help you pay off $5,000 in debt

Take the money you're lending the government and apply it to debt instead.

By Stacy Johnson Feb 2, 2010 5:35PM

This post comes from Stacy Johnson at partner site Money Talks News.

 

Think you don't have any money to pay down debt? If you're an average American, you may have more than you think.

 

Much of what I've done for the last 20 years, in both books and news stories, is talk about debt -- specifically, why you should avoid it and how to find the money to destroy it. Most of the money I suggest harnessing for debt destruction comes in dribs and drabs from doing things like smart shopping and avoiding dumb deals. But sometimes there's something big you can do.

 

This is one of those times.

 

Watch the following 90-second news story I just did on how Uncle Sam can help you destroy close to $5,000 of debt over the next year. Then meet me on the other side for more.

 

 

Just to make sure you got the concept, here it is again in a nutshell:

  • Take your tax refund for 2009 and apply it directly against your credit card or other debt. If you're the average taxpayer, that should amount to about $2,400.
  • If you're not expecting your income tax situation to change this year, head to the IRS withholding calculator. See if you can get a bigger paycheck by legally increasing your personal exemptions, thus having less withheld. (Note: The key word in the preceding sentence was "legally." Overwithholding can put you between a dog and a fire hydrant.)
  • File a new W-4 with your employer and get a fatter paycheck.
  • Put every dime of that newfound wealth against your debts. If you're the average taxpayer, that should amount to $200 a month. 

Grand total: $4,800 less debt in 12 months with little sacrifice, because you're essentially using money you were already putting aside. You just stopped lending it interest-free to Uncle Sam and started using it for a higher purpose.

This strategy will obviously help destroy your debts. But just to drive the point home, let's see exactly how much.

 

Let's assume you have a $5,000 balance on your credit card and you're paying 18% interest and making minimum payments (the interest, plus 1% of the balance). Here's what your future looks like:

  • Time to pay it off: about 23 years.
  • Total interest: about $7,000.

Now assume you use the tax refund method. Here's what that would look like:

  • Time to pay it off: 15 months.
  • Total interest: about $300.

So there you have it: If you apply your $2,400 tax refund and then find an extra $200 a month, you can save close to seven grand. 

And if you don't have a $2,400 tax refund heading your way and/or can't modify your W-4 to find an extra $200 a month? Find it elsewhere by checking out other tips right here, at Money Talks News or elsewhere. You've seen what extra money can do. Do your best to find it. 

 

Because whether you can get Uncle Sam to help or not, destroying debt will put thousands of dollars into your pocket rather than your banker's. It's just that simple.

 

Related reading at Money Talks News:

46Comments
Feb 3, 2010 3:38PM
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This article is information that is already known by most people who have completed w-4 forms for employment.  I will repeat what was already said, "Who wants to owe the IRS?" Also, what does people who are already irresponsible do when they receive a tax return?  They buy clothes, jewelry, food, take trips...not pay bills.  If you claim more deductions you will not get the lump sum but a small increase in your pay which will allow you to purchase a little more food and gas to get to work.
Feb 3, 2010 3:27PM
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I knew this was too good to be true, I dont have any credit cards except for my debit card and that is all I need.  The credit companies stay ripping off consumers with unnecessary fees, crazy interest rates, and closing of people's accounts and now they want to you adjust your W4  to bring home more money and use your tax refund to pay them are they serious, lol.  Thumbs down
Feb 3, 2010 3:13PM
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Why would i want to change anything and risk owing the government at the end of the year?  Why not just take this year's return of $2400 and next year's return of $2400 and basically wipe out the debt in 2 large payments.  I am sure that paying the minimum through the year will knock out the other $200.

Feb 3, 2010 3:04PM
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Or. You can do what lot's of people do. You have $2400.00 coming back, so pay extra to get your money right away instead of waiting a couple of weeks, so you can use the $2300.00 left to buy a $3000.00 big screen for the Superbowl, and end up further in debt.
Feb 3, 2010 2:19PM
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i have the solution for almost all our issues at hand:

 

1st:

instead of giving our hard earn tax money to crooks they need to do this:

2nd:

pay every person over the age of 50; 1 million dollars to retire.

they must retire to accept the payout.

now there will be about 35 million new jobs - job crises fixed

3rd:

they must buy a new auto - auto industry fixed

4th:

they must buy a house or pay off there notes - housing & fixed

5th:

they must pay off there credit cards - banking fixed

this will get thing going again and you would have a lot of happy retired people and lot of happy people getting new jobs!!

your thoughts!

 

Feb 3, 2010 2:06PM
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Well that kind of sucked, I thought they were going to give me some big revelation about a government debt program or something.............not tell me how I can just pay in less Federal tax per payday, doesn't everybody already know that?

 

I personally think that most of us would rather have the lump sum refund at tax time. For most people I know, tax time is the only time of the year that they have any extra money; therefore all of their big purchases/and debt payoffs occur during this time. Also, smaller amounts of money (like the 200 per month) are not well spent, and seem to "disappear" in everyday expenses............or they do for me at least.

 

Seriously though, as an accountant ( and someone who underpaid federal taxes one year!) I can attest to this: Change your withholding at your own risk. Make sure you are paying in enough tax, or refund time will not be so fun for you.

Feb 3, 2010 2:01PM
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My husband and I have no debt. If we can't pay cash, we don't buy. Not a lot of fun, but nothing hanging over our heads. And in this economy, we are grateful to be in that postion.Red heart
Feb 3, 2010 1:54PM
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SadSad i been paying too much taxes so that the bonuses would flow like milk and honey to those who have more than enough. thats about as fair as it gets. SmileSmile
Feb 3, 2010 1:21PM
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Rocketmann, the object is to get a small refund like the article stated,a large return means you just borrowed Uncle Sam free money,not hard to figure out.
Feb 3, 2010 12:51PM
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I'd normally agree with Mr Johnson-- usually there's no point in giving Uncle Sam an interest-free loan.

 

But on today's interest rate climate, money in the bank is a tax-free loan as well-- interest rates are barely above 0%.

 

Decreasing withholding will put more money in someone's pocket, which they are more likely to fritter away without thinking of it.  In that sense, the extra withholding is like a forced savings account (earning exactly 0% interest).  So in that sense, it's probably better for many people to be over withheld-- then take that check and pay down that CC bill!  It's like the old "Christmas club" accounts at a bank-- but this one's an "Easter Club". 

 

In short, the benefits of an automatic savings is probably greater than the benefit of having more $ in your paycheck.

 

(This assumes that they don't do one of the most idiotic things on earth, and that is to get a "refund anticipation loan", for their refund).

 

Of course, a disciplined person, who will really take that extra 200 to pay off CC should do it--though perhaps that kind of person is less likely to be carrying a balance in the first place.

 

Feb 3, 2010 12:47PM
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Since many of us are unemployed. scrapping by with unemplyment ,why in hell hand out our tax refunds to our creditors, are banks struggling like we are? Im sure there is got to be another way uncle sam can help the tax payers, its our money you are suggesting we hand out to creditors, banks got help from uncle sam to give them time to get back on their feet . what kind of help is the taxpayer getting? LET UNCLE SAM PAYY  OFF OUR DEBTS MY @SS THATS NO HELP, NOT WITH MY MUCH NEEDED TAX REFUND.
Feb 3, 2010 12:37PM
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Take the 2400 to the casino and double it.
Feb 3, 2010 12:33PM
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Taxmomma, You are the Antichrist. Your line of thinking is the exact reason why the economy is going in the crapper. Let the poor spend it on more debt. I have a lot of stock in BofA and other banks. I NEED THAT INTEREST!!! $2500 can buy a lot of stuff at Walmart. Watch out for the falling prices EVERY DAY!

If you cant catch the EXTREME sarcasm here, please adjust your W-4 accordingly. 
Feb 3, 2010 12:25PM
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WOW!! What a revelation!! To bad I have already been doing this for about three years now...any other bright ideas!?!
Feb 3, 2010 12:18PM
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Wow, all of you writers taking potshots at the journalist really ought to get a life.  I too am a professional  tax preparer/accountant and I can't even begin to count the number of people who need these articles that Stacy makes.  So many people have no clue how to save money, budget, pay down debt, live within their means, etc.  And so many of them think that a large tax refund is a bonus to go buy more stuff.  I counsel my clients and give classes on these very things and most of the people act like this is the first time they ever heard of such things as "not loaning uncle sam money", using the extra money in your paycheck to pay down debt, etc.  No, their mantra is consume, consume and more consume.  Now that many of them have lost jobs and have to figure out how to live on less they are beginning to listen to me when I try to help them budget, pay down debt, etc.

So to all of you who are so critical of such good advice, if it doesn't apply to you, then don't respond.  Duh.

Feb 3, 2010 12:16PM
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Heard on the national news the other evening that 2/3 of our total US budget is projected to go to interest only within 9 short years! The government projection assumed a rather best case scenario! In addition, 1/4 of our population or 75 million americans will be 60-75 (boomers) and spiking medicare, social security & healthcare!! Also, they have next to nothing saved, most have little or no equity in their homes!! Government now employs 20% of us, 20% are retired government and 20% of us are taking some sort of government service! With this many voting for more government, one could make the case we have a national conflict of interest built in when voting!! We need to treat our debt, deficit and too big to fail government like it's a war! We must downsize government dramatically and soon and look at every dime we spend under a microscope-our lives depend on it-WE'RE PAST THE TIPPING POINT!! Start learning chinese if ya don't act now!
Feb 3, 2010 12:09PM
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Heard on the national news the other evening that 2/3 of our total US budget is projected to go to interest only within 9 short years! The government projection assumed a rather best case scenario! In addition, 1/4 of our population or 75 million americans will be 60-75 (boomers) and spiking medicare, social security & healthcare!! Also, they have next to nothing saved, most have little or no equity in their homes!! Government now employs 20% of us, 20% are retired government and 20% of us are taking some sort of government service! With this many voting for more government, one could make the case we have a national conflict of interest built in when voting!! We need to treat our debt, deficit and too big to fail and failing government like it's a war! We must downsize government dramatically and soon and look at every dime we spend under a microscope-our lives depend on it-WE'RE PAST THE TIPPING POINT!! Prepare for a generation of deflation, start learning chinese and start asking your relatives for a room if you don't act now!
Feb 3, 2010 12:06PM
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The problem is not with the article or the writer but the commenters. Other than "reality check..." you guys dumb, the article is clear.  I am not in debt so the article doesn't apply to me but some it would.
Feb 3, 2010 12:05PM
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Classic example of when the Editor leaves early for the day and the interns submit dopey articles like this with a mis-labeled, falsely titled story. 
Feb 3, 2010 12:03PM
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Wow, it looks like this stirred up some angry posts.  The article makes complete sense - I have done taxes for years, and have given the same advice all along.  People who have larger than necessary federal income tax withheld from their paychecks aren't doing themselves any favors.  Sure, you get a big refund at the end of the year to go on vacation or hire a hit man to take out your neighbor's dog, but if you have credit card debt or any other obligations where you're only budgeting for a minimum payment, do yourself and Uncle Sam a favor - adjust your withholdings.  If you're getting a large refund this year, as many people will, use it to pay down the debt immediately and use the extra take-home pay (by making the proper withholding adjustment) to budget larger debt payments.  The numbers may be slightly fuzzy, but Stacy IS dealing with averages, after all.  The point is, by using funds you have available now, you can remove the debt and stop wasting money on interest as soon as possible.  Your neighbor's dog (and the neighbor, I'm sure) might even appreciate it and stop chewing up your newspaper.
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