Would you like to make an interest free loan to the U.S. Treasury?
by Herbert K. Daroff, J.D., CFP®, AEP®Mr. Daroff is affiliated with Baystate Financial Planning in Boston, Ma., and is a contributing editor to this magazine. Connect with him by e-mail: firstname.lastname@example.org
Headlines are everywhere: Anger, Confusion Over Dwindling Refunds. Is Trump’s Tax Plan to Blame? As Refunds Shrink, Treasury Dept. Reminds Workers of Bigger Paychecks; Smaller Tax Refunds Surprise Those Expecting More Relief.
But, the amount of the tax refund is NOT what we should be looking at. In fact, smaller tax refunds provide taxpayers with more funds to work with during the year. Again, the Treasury Department itself said it best: workers have bigger paychecks. Right On!
What is a refund, after all?
Would you like to make an interest free loan to the U.S. Treasury? Of course not. But, that is what you do if you receive an income tax refund.
If you under-pay your taxes (withholdings and/or estimated tax payments) by too much, you may have to pay interest (and maybe penalties, too) along with the tax. However, if you over-pay your taxes (withholdings and/or estimated tax payments), the IRS simply gives you your own money back, interest-free.
Since most taxpayers were in a lower income tax bracket in 2018 than in 2017, the withholdings on their paychecks was smaller. Their paychecks were higher. The statistic to watch is whether the TAX paid in 2018 is higher or lower than in 2017, not whether the REFUND is higher or lower than in 2017. At least one tax prep service used to advertise that they could help you increase your tax refund. They may not have been promoting any SAVINGS in the tax. They could increase your refund by convincing you to increase your withholdings on each paycheck and/or paying estimated tax payments.
I try very hard to NEVER receive a refund. Paying a portion of my taxes without interest and without penalty means that I had the use of the money during the year. I don’t need the IRS to provide me with a forced savings plan, at NO interest.