Say NO to Tax Refunds

Tax Refund

Can we kill the habit that low to moderate income people have of celebrating tax refunds? I think we are old enough to know that no one gives anything for free, not even the government, regardless of what some people on the certain end of the political spectrum like to claim. Yet, we get up every January anticipating receiving that W2 in the mail as our ticket to run down to the next H&R Block office or to pay a visit to that guy who dances on the corner wearing a cheap Statue of Liberty costume made of polyester. All because we are anticipating a big windfall from the past 12 months of over payment.

While our tax code is complex, taxes themselves can be boiled down to a simple concept: You owe the government a certain amount of money based on services provided. Any amount you may have paid that was less than what you owed (based on income) will result in a tax bill the first business day after April 15. Any amount you paid that was in excess will be refunded.

The government determines what you owe based on a combination of factors, primarily your taxable income and your exemptions. While it is very difficult to determine exactly how much you owe and avoid a refund or a bill, I think the goal of the individual tax payer should be to reduce their refund as much as possible while avoiding a tax bill. I think a $1,000-1,500 refund is a reasonable margin. That equates to $80-125/month of over payments during the course of a year.

Why does any of this matter?

Ask yourself: Where can you get an interest-free loan? Who is willing to lend you $5,000-10,000 for 12 months with just a “thank you” in return? That is exactly what your big refund is: a interest-free loan to Uncle Sam to use for one year, while you paid interest on your own student loans, credit card balances and mortgages. If you get a $2,500 refund, this year, what could you have done with an extra $200/month? How much would you have saved yourself in interest if you were able to pay your credit cards off?

I think if we change our perspective about what a tax refund actually is, we will accomplish two things: 1) understanding the importance of reviewing and revising our W4s throughout the year as our situations change 2) realizing that refund checks are not “free money” that allow us to get tattoos and throw parties, but our own money that was withheld from us all year and we need to manage wisely.

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