It’s painful to pay taxes, but can you imagine how painful it would be if the government billed you once a year rather than withheld taxes from each paycheck? Truth is, the pain would be cast upon the government because you wouldn’t have the money to pay your taxes.
For this and other reasons, the government withholds income taxes as you earn wages. The general construction of withholding and the tax collection effort result in a purposeful over withholding of your money. This provides the government with several advantages, including borrowing your money without paying you interest, better ensuring it collects what is legislated to be due, and creating stimulus for the economy in April and the coming months as consumers spend their tax refunds.
You have the right to reduce the amount you pay the government to ensure you pay only what is due. You have no duty to provide them with a pad nor to participate in a savings plan that doesn’t pay interest. The notion that a large tax refund is a good thing is absurd. About the only value it has is to force the discipline to save (but the value of saving in this manner is highly questionable).
How’s this working for our country? Don’t most people just spend the money anyway?
The average federal tax refund has exceeded $2,000 for some time. This money could be used to pay down your credit card balances, your mortgage, invest in your retirement fund or to contribute to your child’s college education fund. If you contributed to your tax deferred retirement account (a 401(k) or IRA), you wouldn’t pay taxes on the contribution, so you’d still receive a refund of 30 cents on the dollar or more depending on your tax circumstances. You are leaving serious money on the table by allowing the government to withhold more than is due and spending your tax refund. Instead, you should reduce the amount you pay in and put that money to work as soon as it’s earned.
Alternatively, you can give it to me and I’ll be glad to borrow it from you interest free. I’ll guarantee repayment and I’ll get the money to you before April 15.
