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5 Reasons Why You Should NOT Get A Big Tax Refund
Wayne M. Davies
I will never forget the day one of my tax clients
came to pick up his personal income tax return.
"How's it look?" he asked.
"Well," I said, "You're getting a refund."
"Great! How much?"
"Oh, it's a big one," I said. "Over $5,000 dollars."
Mr. Taxpayer couldn't have been happier. He face lit up
like a light bulb. He was ecstatic -- he sincerely believed
that he had "beat the tax man" by getting such a large
refund.
I was not so happy. I couldn't understand his thinking.
So I asked him if he really meant to get such a big
refund. Mr. Taxpayer was a W-2 employee and so I wondered
if his payroll department made a mistake -- were they
doing his withholdings wrong? Did he really want to
have so much tax taken out of his paycheck each week?
Mr. Taxpayer went on to tell me that he has a
tremendous fear of having a balance due on his return. For
some reason, he just assumed that if he ended up owing money
to the government at the end of the year, somehow he
would get in trouble with the IRS. So he went to the
opposite extreme.
In addition, he thought that getting a big refund was
a great way to save money during the year, so that at the
end of the year he got a nice little "bonus" from the
government. You know, a forced savings plan.
I can think of at least 5 reasons why Mr. Taxpayer's
thinking is flawed.
REASON #1: When you get a big refund, you are loaning
your money to the government.
My biggest objection to getting a large refund is the
simple fact that you have given the IRS an interest-free
loan of your hard-earned money.
Mr. Taxpayer's $5,000 could have been earning interest over
the course of the year. So by letting the government keep
his money, he was actually losing money!
Sure, with rates so low, maybe we're not talking about
a lot of interest income here, but why give the government
your money any sooner than necessary?
REASON #2: Getting a big refund does not mean you are paying
less tax.
I know how complicated are tax system is. It's crazy,
convoluted, chaotic and inconsistent. I deal with our tax
laws every day, and there's stuff in there that will drive
any sane person over the edge.
But on this point, there really is a lot of misunderstanding
on the part of innocent (but misinformed) taxpayers:
Getting a large refund does not mean that you somehow paid
less tax than if you got no refund.
I'm serious here -- there are taxpayers out there who think
that getting a refund means that you somehow "beat the
system." This is nonsense. Think about it -- all you did was
get your own money back! It was your money all along,
all you did was postpone getting it.
REASON #3: Having a balance due does not increase the chance
of audit.
If you have a balance due, you do NOT end up on some IRS
"hit list." But for some reason there are many taxpayers who
have this unfounded fear of owing money to the government.
This fear causes people to unnecessarily go to the opposite
extreme -- "I've got to make sure I never owe, so I'll just
have way too much withheld to be safe."
Safe from what? This fear of an audit is pure hogwash.
REASON #4: Getting a large refund is usually a sign of poor
(or non-existent) tax planning.
Many folks do not realize how easy it is to get out of
the "big refund rut".
You have control over how much you pay in to the IRS during
the year. If you or your spouse are W-2 employees, you can
change your withholdings very easily. Just file a new Form
W-4 with your employer and you won't have to wait so long to
get your money back.
If you are self-employed and making quarterly estimated tax
payments, the same principle applies. With a little number-
crunching you can determine the minimum amount of estimated
tax payments you are required to make.
Whether you are self-employed or work for someone else, if
you're not sure how to do these calculations, get help from
your local tax professional.
REASON #5: Getting a large refund is usually a sign of poor
(or non-existent) financial planning.
My client insisted that he needed a large refund so he could
have a nice nest egg to look forward to every Spring. He was
using the government as his short-term savings plan.
I told Mr. Taxpayer this:
"If you want to save $5,000 dollars over the course of the
year, just authorize your employer to deposit $100 per week
into your savings account. Then at the end of the year,
your $5,000 will be sitting in your own bank account instead
of at the U.S. Treasury.
And you won't be in such a frantic frenzy to get your tax
return filed."
So I urge you to reconsider such an approach to money-
management. Why let the government have your money? Don't
wait until the end of the year to get your money back. With
a little planning and self-discipline, you can take control
of this part of your life.
Resource box:
Wayne M. Davies is author of the new eBook, "The Tax
Reduction Toolkit: 29 Little-Known Legal Loopholes That Will
Reduce Your Taxes By Thousands (For Small Business Owners
and Self-Employed People Only!) Don't file another tax
return until you visit:
http://www.YouSaveOnTaxes.com/toolkit.html |
Tax Refund Related News
Long-distance calls may ring up refund (The Star-Ledger)It may be time for big talkers to start pulling out their phone records. An obscure federal tax on long- distance telephone service, im posed in the late 1800s to fund the Spanish-American War, is finally being phased out because of court challenges.
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