Would you lend the government money interest free? Sounds crazy, doesn’t it? But that’s exactly what millions of us do every year when we receive our IRS refund.
Your refund may seem like a gift, but it’s actually not. We receive a tax refund simply because we paid the IRS more money than we needed to. Far from being a windfall, our tax refund is money we rightfully earned.
Your refund may seem like a gift, but it’s actually not.
Receiving a tax refund means that you’ve essentially given the government an interest free loan, and most of us do this every single year. In fact, more than 3 out of 4 tax filers receives a refund, with the average refund reaching nearly $3000.
A Simple Fix
Don’t want to lend the government money interest free? There’s a simple fix. Go to your company’s payroll or human resources department and adjust your withholdings on your W-4 form. This will ensure that less money is taken out of each paycheck for taxes. You’ll get more in your paycheck each week, instead of receiving a large IRS refund at the end of the year. As a result, the government will not receive its interest free loan from you.
There are a few caveats. If certain things change during the year, – like divorce, marriage, job-change, etc. – they could affect your tax liability, causing you to even owe money in taxes at the end of the year.
Furthermore, changing your W-4 withholding may not work if a large percentage of your refund is due to the Earned Income Tax Credit.
More importantly, consider this: Is giving the government an interest free loan such a bad thing if it forces us to save money, something most of us are terrible at doing anyway?
We say we want to save. We want to do the right thing, but the sad fact is that too few of us do it! According to a GoBanking Rates survey, 69% of Americans have less than $1000 in savings. A Bankrate study revealed an equally sobering statistic. Sixty-six million Americans have no money in an emergency fund at all.
Let’s admit it. Human willpower is weak. Sometimes the only way we save money is by being forced to save. Instead of looking at a tax refund as an interest free loan, consider it an automated savings program. Yes you could chose to get a bigger paycheck every week rather than a lump sum tax refund, but we humans have this insane ability to fritter away our money.
But, but, but …. you’re giving the government free money in interest. Consider, a typical savings account earns you a measly 0.5% interest rate at best, meaning the typical “IRS loan” of about $3000 would net you a whopping $15 if placed in a savings account. This is a small price to pay for being enrolled in a automated savings program.
The only thing you have to be careful of, is putting your newly earned savings to good use.
BMWK, what do you think? Do you have a problem giving the government an interest free loan?