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Do You Really Like Loaning The Government Money?

This is a reprint of a blog I wrote over three years ago, but it still makes sense today.This is a reprint of a blog I wrote over three years ago, but it still makes sense today.

So, you have filed your income tax return with the IRS and your state, and are now waiting for the refund the government(s) owe you. You are thinking of all the things you can do with that money when you get it. Here are some things to think about as you wait:

1. These refunds are in effect interest-free loans you have made the government(s) over the year through excess withholding. They are just paying you back the money you earned over the previous year that won’t even earn interest unless you file an extension and wait even longer for your money. This is even worse than that bet that your buddy owes you because at least you know where to find him if he doesn’t pay you right away. With our government you call on the phone and wait an hour for them to tell you that the refund is being processed or go on their website and find out there is a problem and you have to call anyway!

2. You could be earning some income on this refund if you take it with each paycheck instead of putting it into additional withholding. Even with the low interest rates now you could be making something on the money if you transferred it each pay period into some form of savings or maybe a retirement account.

3. When you get this refund back and blow it on some splurge purchase before it burns a hole in your pocket, you should realize if you were getting this money back on each paycheck, you would probably be earmarking the smaller amounts for some goal rather than buying a new iPhone. By automatically withdrawing the additional money from your checking and stashing it in some other account, you have a better chance of allowing it to accumulate without seeing dollar signs when you get that refund.

Just remember, the best tax planning advice is to pay some tax on April 17, not enough to owe a penalty, but enough so you have the most use of your money and the government has the least use of it.

If you want to call or email me we can talk about it further and maybe change your withholding so you are the borrower, not the lender in this case.

Have a question? Contact Brian Stoner. Your comments are always welcome!