Posted By Wade Michels

Just Say No to Big Tax Refunds

Paying what you owe and no more should be the goal of every taxpayer.
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Very soon, folks will either be handed a check for around $2,900 - this years average projected tax refund or will end up with a fat tax bill because they failed to withhold enough from their paychecks. While a large tax refund of $2,900 or more sounds great, there are consequences / opportunity costs for receiving such a large sum.

So right about now, you’re either king of the world or singing the tax bill blues. But it doesn’t matter if you’re paying out cash or getting it back, believe it or not -- you’re losing.

Bad

Admit it, year after year you look forward to getting that gigantic tax refund. While you’re counting down the days until that check arrives, take a moment and think long and hard about why you’re getting what you’re getting.

Look at it this way, a tax refund is like going to the grocery store, and paying $100 for stuff that costs $80. You know that you’ve overpaid so you go back to get the difference. It just doesn’t make much sense does it? Clearly it would have been better to have just paid the $80 in the first place and called it a day.

So you’ve dutifully paid your taxes, but you’ve paid too much, and now the IRS is giving you back the difference. Unfortunately, the government has been holding onto your cash for far too long and is only now paying up, and without interest! Sadly, the lost interest on your money is a missed opportunity, essentially its cash that's flown out the window.

Horrendously Bad

Newsflash! If you don’t withhold enough to cover your tax liability, you will have a tax bill. It doesn't take a brain surgeon to know, that owing the IRS a large sum of money shouldn’t be on your to do list.

What's wrong with borrowing from the government and receiving an interest free loan? While this should work out wonderfully, most folks aren’t disciplined enough to set cash aside for this impending rainy day. So if you don’t plan for this massive tax liability, you may have trouble paying it back. Heck, I know folks who use a credit card with an 18% interest rate to pay their taxes. That’s horrendous.

Your Psyche

Now it’s easier on the old noodle for you to get (as opposed to give) money, but there’s a real danger of thinking this way. Many end up wasting a tax refund on some very creative stuff. Why? Because “found” money is not earned, it’s not planned for, and it’s not scripted, so it becomes easier to let go.

The truth is, there’s no such thing as found money. You’ve already earned your refund, it’s a part of your paycheck, its the same cash you use to pay your rent or mortgage. I'm sure you can find a better use for it than giving an interest-free loan to the government.

Now What?

Let’s say your due to get the average $2,900 return from the IRS. But instead of giving Uncle Sam the cash (with some pretty terrific interest-free terms), you decide you want to control your own financial destiny. So what do you do?

Well, you could divide the $2250 by 52, which would equal about $44 per week, and put that $44 into a high yielding savings account. Even in this rotten economy, some banks are paying around 1.5% on your money. By the time tax season rolls around, you’ll already have a nicely funded savings account, plus some pretty sweet interest on your money.

Here, the government owes you nothing. You already have what would have been your refund, plus a little interest. If you’ve loved getting that tax refund check, this strategy should really appeal to you.

Balance

In a perfect world, you’re savvy enough to get yourself into a position where you won't owe the IRS and it won't owe you. This joyous scenario means you’ve satisfied your full tax liability and you’re even-steven with the government. Paying what you owe and no more no less, should be the goal of every taxpayer.

Fin

An interest free loan doesn’t make much sense for you or the IRS. If the recent bailout of insolvent banks tells us anything, it’s that good ol’ Uncle Sam isn’t the best handler of money. So hang onto your cash, it’s precious, it’s yours and you've toiled for it. Simply use your money to make more of it -- for you.

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