Open a Separate Bank Account for Your Tax Payment or Refund

April 12, 2008

Do you hate the hassle of printing out and mailing in your tax return every year?  According to the IRS, 80 million people avoided the hassle last year by choosing to e-File their taxes.  For those not aware, e-File simply means you send in your tax information electronically using tax software on your computer.

e-Filing Taxes
One of the convenient things about e-filing is that you don’t have to mail in a check to pay your taxes due.  Instead, you provide bank account information and the payment is deducted directly from your balance. If you’re getting a refund, the money will be deposited into your bank account.

If you’re going to e-File, I’d suggest opening a separate bank account to use just for tax purposes.  I did this several years ago and it’s worked out nicely.  Of course you’ll want to make sure your bank doesn’t charge you any money for opening an additional account. 

Help Managing Your Taxes Due
 The main benefit of having a different “taxes only” bank account is that it helps you stay organized.  If you’re going to owe taxes you can deposit some money every month so you’re not hit with a big bill and no funds to pay it come tax season.  If you’re putting the money into a separate account you’ll know that money is just for taxes and not to spend it for other things.

Maintaining the Appropriate Balance
Something you want to avoid is opting for electronic payment for your tax bill and then not having enough money in your account to cover the total.  Think of the mess you’d create if you gave your primary checking account to the IRS and your credit card payment cleared the exact same day the IRS tried to withdraw your taxes due.  If you have a different tax account you can deposit the appropriate balance and just leave it alone, knowing you have enough cash available to pay the taxes.

Tax History Snapshot
 Having a separate account can also provide an easy snapshot of your tax bills over the years.  If you want to know how much you paid for a certain year, just look back at the account history and you can see the trend in tax payment amounts.

Working with Tax Preparers
Another benefit is having account information you can share with others.  For example, we hired our tax attorney friend to do our taxes this year.  His firm can e-File the return for us, he just needs the bank account and routing number we want to pay from.  We don’t have to worry about giving out our primary checking account since we have one just for taxes.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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3 Responses to Open a Separate Bank Account for Your Tax Payment or Refund

  • Ben

    NH Mom, setting up separate accounts can be really helpful for organization. I know some banks, like ING, will let you manage your own escrow for your home loan.

    You might even think about having one account for income tax and a different one for property tax.

  • NH Mom of 3

    We were thinking of doing a variation of this, setting up our own “escrow” account for our property tax savings (monthly) and payments (2 times per yr) as a dedicated account. Perhaps calling this the “taxes” account and including income taxes would be a good idea. We are set to close on the new home on May 1st (we are renting currently) so there is still time to set up the Tax Account. Our lender does not require us to pay property taxes in escrow with them as we are putting 20% down.


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