Can I borrow $2,500 and give it back to you next April?
You: Are you going to pay me interest?
Now that you mention it–nope. No interest. Just the $2,500.
You: No way. You’ve got to pay me interest. That’s my money you’re talking about. I’m no charity.
Good to hear, right answer. Yet unfortunately many people just like you make a similar interest-free loans to the government every year by receiving big income tax refunds. Furthermore, many people rationalize their sizable refunds by calling them savings.
You: Yeah, that way even if I don’t do any savings all yearlong, I know I have a couple of grand coming to me next April.
What did you use the money for when you got your refund last year?
You: Well I debated between this high-def TV and a really nice vacation – but then wound up using most of it for tickets to–
You didn’t really save it then, did you?
You: No, not really. But I had a great time!
And that’s my point. It becomes a slush pile for you to spend on something you’ve had your eyes on. Yet my hope is that you never get that refund again.
You: Excuse me? That sounds almost Gary-like. You trying to separate me from my money?
Of course not, but that income tax refund is usually just bad financial planning. I want you earning interest on your money as you earn it, not the government.
You: Come again?
By re-filing a Form W-4, you can give yourself a raise.
You: You sure?
Absolutely. If you keep getting a large federal income tax refund and expect that to continue next year, simply lower your federal income tax withholdings using Form W-4 and you’ll enjoy an increase in your net pay right away.
For help adjusting your withholdings, see the IRS’s calculator but going to the IRS web site and typing in the search box “withholding calculator.”
Even those more responsible types who use the refund money to pay back some existing debt are making a bad financial decision. By following the steps outlined above, they could be paying off more of their debts sooner, saving significantly in the amount of interest they pay!
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