Although 75% of people that pay income taxes look forward to receiving a large income tax refund (over $3,000), all of the arithmetic points to this tactic as being a financial mistake.
Current income taxes for federal and state returns combine for 50% at the top rates. For medium and high income earners, income taxes are the largest obstacle to saving and accumulating money. If you do not actively reduce your tax burden, then it is like handing the IRS a cash ‘tip’ of thousands of dollars a year.
Your tax planning should include strategies for tax minimization but also for creating a minimal tax refund. What are some reasons why it is not in your best interest to get a large tax refund?
- You are delaying access to your own money that you have already earned. This is money that you cannot spend, invest, donate, or save until you receive it back from the government a dozen months later. Why would you do this?
- The most common reason people want a large refund is because it is a lazy way to save or afford a large purchase. Unfortunately, this is a costly way to create a random-sized lump of money – instead of a controlled amount of monthly savings to hit specific savings targets when they are needed. The financial literate have tiny tax refunds and map out their savings needs to make certain they occur.
- This money is a free loan to the government, at your personal expense. Federal, state, and local cities are already warning that there will be refund delays this year from late tax changes and they claim to be perpetually underfunded and understaffed. Again, why are you actively allowing a government bureaucracy to decide when to release your own money back to you?
What would the government do if roles were reversed and, instead, you held onto their money for a year? You’d pay steep penalties, plus interest, and be audited by the IRS forevermore.
Plan your taxes and use the IRS withholdings calculator to minimize your refund and get your money under your control for your maximum benefit, not theirs.