Updated: 4/17/2012 12:20 AM ET|
Why I hate income tax refunds
That big, fat tax refund really means you've given the government an interest-free loan. It's far better to keep the money you earned in the first place.
Refunds: They're wrong!
It's hard to get that through to my clients. But refunds are bad.
Sure, it's exciting to get a check from the Internal Revenue Service. Well, actually, it's from the Treasury, but you know what I mean. That misses the point, however.
It's not like you're gaining anything. That money was always yours. The feds are just giving it back. And that's the point.
When you get a refund, what that really means is that you've given the federal government an interest-free loan. You're just getting your money back.
In fiscal 2010, nearly 52 million taxpayers received refund checks, with an average refund of $3,082, up from $2,683 the year before. No matter how you do the math, that's a whole lot of interest-free dollars (about $160 billion).
An offer you can't refuse?
People just don't learn. They want that check from the government. But I can give you the same deal.
I hereby offer to allow anybody reading this to send me money. I'll take cash, checks, money orders, even food stamps. Send me as much as you want. And I promise -- on my word as MSN Money's tax expert -- that I'll send it back to you next April, without interest.
It sounds silly when you put it that way, doesn't it? But it's no different than getting a tax refund from the IRS.
Some people argue that refunds are a great way to save money. If they never see the dollars in their checks, it's easier to put aside money for, say, that big-screen plasma TV they've been drooling over.
Open your eyes, financial fool! That's what payroll savings deductions are designed to do. Increase your retirement-plan contributions. Buy savings bonds. Or just put an extra $50 per paycheck into a money-market fund.
Here's what I'll do. I'll up the ante on my original deal. Not only will I give you your money back, but I'll add a whopping 1% to your original contribution. That's more than money-market funds are paying. You can't beat that kind of deal.
Aim to withhold just enough
If I can't entice you with my "deal of the decade," what should you do?
Aim for the safe harbors. That's the minimum amount you have to pay during the year to avoid any interest and penalties. There's no interest or penalty if any of the following apply when you file your return:
- You owe less than $1,000.
- You've paid in at least 90% of your 2011 liability.
- You've paid in at least 100% of your prior year's total tax.
If your adjusted gross income (Line 37 on your Form 1040 for 2010) was more than $150,000, you need to pay 110% of your total tax, rather than 100%. So if my 2010 adjusted gross income was $160,000 and my total tax was $10,000, I'd need to pay 110% of that, or $11,000, during 2011 to hit that safe harbor. If I do that, there's no interest or penalty to pay, regardless of how much I owe in April 2012.
If you're paying through withholdings, they are deemed to be paid evenly during the year, regardless of when they are remitted. I have some clients who have nothing withheld during the first 10 months and then meet their safe harbors with November and December withholdings.
If you're making estimated payments, they need be equal or, if your income varies substantially during the year, proportional to the income earned during each quarter. So on a simplistic basis, if I have $100,000 in income earned and $40,000 was earned in the first quarter, I'd need 40% of my tax paid in during that quarter. Technically, it's called the annualized income installment method, and it's a bit more complicated than my example.
See Form 2210 (.pdf file) for the required computations.
If you expect to owe additional taxes, it would be prudent to put those dollars into a money market fund (or send them to me) until needed. At least that way, as opposed to increasing your payments to the IRS, you'll get the interest. Just make sure you hit one of the safe harbors.
And don't get any more big refunds. Refunds are bad, bad, bad! Trust me on this.
VIDEO ON MSN MONEY
Tru Dat and Les611
This article is NOT talking about people who do not pay income taxes and get large returns. If that were the case then it wouldn't be a tax free loan. In those cases the government is actually paying them not them paying the government. It is not the same.
i think its all moot to begin with.
the fact is that THERE SHOULD BE NO INCOME TAX PERIOD.
the 16th amendment was never properly ratifide.thereofre it should not exist.
it was a scam put forth by the federal reserve and the central banks to take control of this country and its government.
I'm sure glad you work with money because you understand the article better here and makes sense of it and can explain why income tax refunds are not bad.
The IRS website has a Witholding calculator. You can enter info from your last pay stub and it will tell you EXACTLY what to put on your w4 so that you can come close to the breake even point. You can change your w4 as many times as you want thru the year. So if after 4 mo it isn't going right change your w4.. IT IS THAT EASY.
No one knows exactly what events will transpire over the next 15 to 20 years as this Fourth Turning morphs from regeneracy to climax and finally to resolution. The mainstream media, most politicians, and self proclaimed progressives are blind to the cyclicality of history. They believe history proceeds in a linear upwards path. These are the people you see on TV talking about toning down the rhetoric, false gestures of bipartisanship, and soothing words about the financial crisis being a thing of the past. They fail to understand that once the mood of the country is catalyzed by a trigger event or events, there is no turning back the clock. Winter must be dealt with head on. Very few, if any, "financial experts" anticipated a housing collapse, followed by a deep recession, a 50% stock market crash, and a financial system which came within hours of total implosion on September 18, 2008. Absolutely no one anticipated the extreme measures taken by the U.S. government and Federal Reserve to "Save" the country from a 2nd Great Depression. These measures have added $5 trillion to the National Debt in the last 40 months. It took 205 years to accumulate the 1st $5 trillion of debt.
While it is impossible to predict the exact trials and tribulations that will confront America over the next decade, the issues that will drive this Fourth Turning were clearly visible to anyone with their eyes open, many years in advance of the Crisis. The authors clearly detailed the easily observable issues that led to the current Crisis back in 1997. Their book is not prophecy, but historically provable interactions between generations based upon the circumstances confronting society at the time.
"Sometime around the year 2005, perhaps a few years before or after, America will enter the Fourth Turning. A spark will ignite a new mood. It will catalyze a Crisis. In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. It could be a rapid succession of small events in which the ominous, the ordinary, and the trivial are commingled." -" - Strauss & Howe -1997
The authors use their common sense, based upon known trends, to posit potential catalyst scenarios such as:
- A global terrorist group blows up an aircraft and announces it possesses nuclear weapons.
- Beset by a fiscal crisis, states begin to balk at Federal mandates leading to secession actions, militia violence, cyber attacks on the IRS, and demands for a new Constitutional Convention.
- An impasse over the federal budget reaches a stalemate. The government shuts down. The President declares emergency powers. Congress rescinds his authority. Financial markets spiral out of control. Default looms.
These "theoretical" scenarios were put forth in 1997. The authors concluded that these were unlikely, but that no matter what the catalyst, the response by the generations would be predictable. It seems this Fourth Turning is being driven by a succession of smaller triggers, rather than one large trigger. The housing collapse, which began in 2005, ultimately led to the world financial system collapse in 2008. The overreach by government in attempting to repair the damage done by Wall Street and K Street led to the Rick Santelli Tea Party Rant heard round the world in February 2009. The Tea Party movement has since taken the country by storm, surprising the linear thinkers and stunning the ruling elite. Last week a congresswoman and a dozen bystanders were gunned down, further darkening the mood of the country and inflaming passions among competing political ideologies. So what happens next?
Great Change is what will be next....
OK I am getting a thousand back from the IRS this year and I am happy. I was also able to save a thousand this year. The thousand I saved earned $5 and change in interest that I had to claim on my taxes. It put me into the next tax bracket so I end up paying more than twice the $5 I earned.
I am better off letting the IRS take it and hold it for me because It is not worth saving it in the bank.
So what? I already know that I (and lots of you others out there who get refunds) don't have the discipline to save money out of my paychecks week after week to save a large chunk of money. That's why we have 401K's and direct deposite payroll & other investments, because we don't even trust OURSELVES with cash.
So you pay a little extra to the government all year long and get a check in the spring. Then do with it as you will, make a major purchase, go on vacation, or save it into the oh so trustworthy banks. Yes it does come down to being a no-interest loan to the government but, if they didn't get it from us, wouldn't they have to borrow it from somewhere else? That's a quarter $trillion to pay back to (possibly) foreign sources WITH interest - and guess where the $$ to pay it back will come from ... ?
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