(Photo credit: 401KCalculator.org)
It is tax season and that means one thing, TAX REFUND CHECKS!
Most people cannot wait to file their taxes. The sooner they file, the earlier they get their “free” money from the government.
Most people already have their refund check spent even before it comes. Are you planning a vacation? What about buying a new big screen TV? Some in my family buy sports season tickets with theirs.
According to the IRS in 2015 there were almost $125 billion in tax refunds. With an average of $3,120 per tax return. Sounds great doesn’t it. For filing some pesky paperwork the government gives you several thousand dollars for free. God Bless America!
What if I told you that the money wasn’t free? What if I told you the refund is money you actually loaned to the government? Would that be surprise to you?
IRS Form W-4
Most American’s don’t realize that the tax refund is not free money at all but actually a refund of your own money, hence the name. So where does the money come from? Let’s dig in…
It all begins on your first day of employment. You meet with HR and they give you your ID badge and a bunch of paperwork. Included in that paperwork is the IRS Form W-4 – Employee’s Withholding Allowance Certificate.
This form asks you several questions about your personal life. These questions include how many dependents you have and if you are married. Based on your answers the IRS then decides how much to take from each paycheck.
Many claim fewer allowances than they actually should, some don’t claim their spouse, and a few just don’t fill out the form correctly. This leads to the government taking more from each paycheck than they actually should.
The Interest Free Loan
Now it is April and you file your taxes. When you file you tell the government how many dependents you have, your proper marital status, along with a lot of other information, including how much you paid in taxes.
Now let’s say you paid $7,000 in taxes last year or about $270 per paycheck. This money was removed directly from your paycheck and given to the government. When you file your taxes the government realizes they should have only taken $4,000, or about $150 per paycheck. So the government gives you a tax refund of $3,000.
You now take this $3,000 and blow it on a big ticket item as if it is a gift from the government. But it isn’t! Throughout the last year you gave the government a no questions asked, interest free loan to spend on whatever they want.
What Can You Do?
Well to start out, when you get your refund this year instead of buying something extravagant, put the money towards your Financial Freedom Journey. A huge tax refund can make a great starter emergency fund or even pay off a credit card in full.
Once you have used the refund from this year it is time to prevent a refund next year. I know that might sound scary, but remember we don’t want a refund. Instead you will have access to your money throughout the year and not in one lump sum.
In next week’s post I will share how to properly fill out the Form W-4. See you next week!
Joel Parker
