Most people are excited at the prospect of a big tax refund. But you take on real risk, and suffer real costs when you give the Federal Government too much of your money.
The Internal Revenue Service (IRS) reports that the average personal tax refund is around $3,000. That’s $250 per month. We each loan the IRS this money, interest free, through the year. Then we wait months to get this money back.
What could you do with an extra $250 each month? I believe in government and respect its taxing authority, and pay my fair share. But I also believe that I can spend my own money more effectively.
The opportunity cost of missing this money each month is significant, especially over the long-run. It all depends how we use this additional income.
Given an additional $250 per month, invested at 7% average annual return, you would realize an additional $100 in interest at the end of one year, or $9,500 after 30 years. Small change? Maybe, but if it’s small to you it’s miniscule to the government, and even more reason for it to be in your hands.
You would also realize gains by paying-down debt. Of course you could always spend the extra cash, in that case waiting for a bigger tax return may be in your best interest.
If you would prefer to improve your tax efficiency by minimizing what you pay throughout the year, and keeping more of your own money. Please speak with your human resources administrators to adjust your withholding. It is easy to change and will generally give you an instant pay increase, and more control over your personal finances.
The bigger risk is that our refunds may disappear. Don’t laugh, it could happen. California issued IOU’s to millions of tax payers that were expecting refunds in 2008. Have you ever tried to spend an IOU? They’re not as liquid as cash.
This was a result of the state budget crisis. The point is that governments change the rules all the time to meet their obligations. If the government decides it must keep more of your money, it will find a way to do it.
I don’t want to speculate as to the prospect of tax increases. However, when you consider the federal debt, and growing federal budget deficits, I don’t see anyone seriously pushing for lower taxes for you and I.
If the IRS already has your money, you don’t have a bargaining leg to stand on. Possession is 9/10 of the law after all.
Alternatively, if you manage your withholding so that you give the IRS just what it needs, or even a little less, then you will control more of your money. That’s the position I prefer to be in.