Monday, February 28, 2011

Does Your Huge Tax Refund Make You More or Less Financially Savvy Than Those with Smaller Refunds?

Does Your Huge Tax Refund Make You More or Less Financially Savvy Than Those with Smaller Refunds?

Let’s say John and Kevin have basically identical sets of circumstances – same income, number of dependents, deductions, etc. But when they filed their taxes, John received a refund check that was three times larger than Kevin’s. Does that mean Kevin’s tax preparer or the tax software he used (if he self-prepared) is substandard?

Well, since their circumstances are identical, and I’m assuming their tax preparers are smart enough not to engage in any illegal activity, I am left with only one conclusion – John advanced or paid much more money to the IRS than he should have! See, people get excited to receive a big refund, but all that really means is that you've given the IRS an interest-free loan and you're just getting back money that already belongs to you. Think about it – why else would it be called a r-e-f-u-n-d?

In the tax year of 2009, approximately 96.7 million folks received refund checks averaging $2,683. As someone who holds a professional designation in cash/treasury management, all I see here is more than $259 billion in interest-free loans to the IRS, and to that I say, “What a deal!” How I wish I could convince these folks to send me just a third of those amounts, and I’ll pay them back (without any interest) at year’s end. Sound like a bad financial deal to you? Actually it is! But, that’s exactly what you do every time you receive a huge tax refund check. I don’t fault the average taxpayer as much as I do their so-called tax advisors or experts who, quite frankly, should know better and help their clients to do some planning during the year.

It seems to me that countless Americans are under this completely bogus impression that those who receive little or no refunds are not as smart as those who receive fat refunds, or that perhaps they are using the wrong preparers or software. That may be true in some cases, but not many. Some people question their ability to determine their tax situation before they actually file their returns at the end of the year. Anyone who holds this view or even thinks that it remotely makes sense needs some serious financial education. The thing is, savvy financial people plan their taxes at the beginning of the year. Everyone should know that the year is over by the time you file and nothing can happen at that point to reduce your taxes or give you more money back.

Did you know, for instance, that the tax rules and rates for 2011 were published before the end of 2010 - like always? So why would you rather pay several thousands of dollars over and above what is due Uncle Sam, only to get it back (without any interest)? Did you also know that you’ll not be disadvantaged on your taxes in any way, shape, or form by receiving a small or even no refund? What I mean is that you don’t get any special credits or deductions by giving the IRS interest-free money.

It really saddens me to see so many hard-working Americans struggling to get by during the year, and as a result racking up interest and late fees on their debt. They spend all year waiting for their tax refunds to pay those bills, when they could have planned ahead by adjusting their paychecks to increase their take-home pay so as to avoid those fees and interest, and spare themselves the stress associated with dealing with creditors. I am not a tax expert, but what I just pointed out does not rise to the magnitude of brain surgery or rocket science. It’s not too late to start now to plan next year’s refund – but you’ll need the help of a professional with some good old commonsense!
Start planning next year's taxes today by visiting with an advisor who can offer you practical, common-sense tips and tools. Get a complimentary overview of your finances by calling 301.949.4449 or visiting Laser Finanical Group on the Web today.

1 comment:

  1. Couldn't agree with you more here.I like how you make this so simple for everyone to understand.

    Rick PKJ


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