Income Tax Refunds:
Why the Rich Hate Them

income tax refunds Photo courtesy of dotben

If income tax refunds make you giddy, you're in for a treat. But I'm not going to be diving into schemes to increase your tax refund. On the contrary, in this article, you will learn why I don't particularly like them. In fact, wealthy individuals despise IRS tax refunds.

Here's the thing. The refund you get from your IRS tax return that you get in the mail was always yours. Think about it. It's not the best way to invest money. You overpaid and all you did was give an interest free loan to Uncle Sam. Now, he's giving it back. He put those dollars to work, instead of you.

With the increase of cash flow used to overpay your taxes, you could have:

The bottom line is that you have incurred an opportunity cost, an eroding factor of money. You have given up the opportunity to make those dollars work for you.

Where's the Potential

In 2009, more than 96.7 million Americans received IRS tax refunds, with an average refund of $2,683. That's more than $259 billion interest-free dollars that Uncle Sam was able to utilize.

Now, let's see what this could do for you. Imagine that instead of receiving $2,683 at the end of the year by overpaying your taxes each month, you send that money to a safe, liquid, interest earning account that earns you 4% (To keep it simple, we'll assume 4% per annum).

Let's see what you end up after 10, 20, 30 years:

YearRate of ReturnFuture Value
104%$32,212.39
204%$79,894.58
304%$150,475.89

How does tacking on an extra $150,475.89 onto your retirement sound? Do you still like income tax refunds?

My Recommendation

For those who want to save on filing, there are some free online tax filing options.

But don't focus on getting income tax refunds. A tax saving tip is to withhold just enough. Pay the minimum amount you have to pay during the year to avoid any interest and penalties. There's no interest or penalty when you file your return if:

**Always check current tax laws.**

  • You owe less than $1,000.
  • You've paid in at least 90% of your liability.
  • You've paid in at least 100% of your prior year's total tax. On your return, that was Line 60. Go check it as you begin planning your return.

According to author Jeff Schnepper:

If your adjusted gross income (Line 37 on your Form 1040 for 2009) was more than $150,000, you need to pay 110% of your total tax, rather than 100%. So if my 2009 adjusted gross income was $160,000 and my total tax was $10,000, I'd need to pay 110% of that, or $11,000, during 2010 to hit that safe harbor. If I do that, there's no interest or penalty to pay on my IRS tax return, regardless of how much I owe on April 18, 2011.

My Enticing Proposal

If you still salivate for that check at the end of the year, I have a proposal for you. Instead of overpaying the government in tax money, send that money to me. I accept cash and personal checks. At the end of the year, I will send you a refund check.

Sounds silly doesn't it? Why not save that money and put it into an ING savings account.

But I'll up the ante.

I will send you a refund check with 1% interest. Come on now, that's more than your money-market savings account. The fact is, I can make, say 4%, interest on the increase of cash flow and give you 1% for lending me the money. That's what I call arbitrage!

So, if you still desire income tax refunds and want to give up your opportunity to put your dollars to work, that's your prerogative. Send Uncle Sam, or me, those extra funds. Otherwise, take advantage of a resource that can help you produce today...your own money.

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