Today is the deadline to pay any taxes owed, or file a tax return. If you have to pay, I can certainly understand why you have procrastinated. It’s always a good idea to put off paying taxes or bills as long as you can (without being late) in order to keep earning interest on your hard earned money.
If you expect a federal tax return, you’ve missed out on three months of debt principal reduction, interest earning, or investment gains opportunity. I have to admit that I procrastinated and received an unexpected federal tax return from my E-file last week. I wasn’t happy about it.
Why?
Although I like the idea of being in a lower tax bracket this year, I essentially gave the government an interest free loan throughout 2011. And because I wasn’t earning any interest, my money was losing value due to the effects of inflation.
Since I anticipated that I would be affected by the same marginal tax rate as the previous year, my tax withholding was too high. If I had estimated my income correctly, I could have reduced my withholding to be more in line with my actual tax obligation. That way I could have come closer to breaking even on my taxes and taken home more pay throughout the year.
Recently, I read that a few studies have found low to moderate income families actually prefer to get a bigger refund. The conclusion was that it was a way for those families to force themselves to save. The behavior of saving by overpaying taxes occurs so often that the IRS has taken steps to get people to save when they file for tax refunds. For some time, taxpayers have had the choice of diverting some of their refund between banking accounts or putting the money directly into an IRA. But recently, the IRS has begun experimenting with tax refund options such as prepaid debit cards and savings bonds.
Does the IRS, a government agency whose purpose is to collect taxes and enforce tax law, have any business promoting savings and a culture of thrift? I don’t think so. They should just focus on collecting taxes. Here’s why:
We are paying over a billion dollars a year to the IRS so they can hold onto $225 billion of taxpayer money in a non-interest bearing account.
Federal Tax Return Statistics
- The IRS refunded 25 cents for every $1 collected last year.
- For fiscal year 2011, the IRS spent 51 cents for every $100 collected.
- The average tax refund for 2012 (week ending 4/6/2012) was $2,794.
What does this mean to you?
The IRS spent $14.25 just to collect the $2,794 from you. I couldn’t find any statistics on how much it costs to process the tax refund, but whatever the amount is, it tacks onto the unnecessary loss in value.
So far, the IRS has refunded $224.710 billion in 2012. Assuming the same collection expense rate as FY 2011, the IRS spent $1,146,021,000 to collect the money that they are giving right back to you. That’s right. They spent One Billion, One Hundred Forty-Six Million, Twenty-One Thousand Dollars just to take our money, only to turn around and “refund” 25% of it. It’s sort of like paying the IRS 0.51% in interest to hold your money for you.
Why are we, as a nation, throwing away this much money? I’m pretty sure that we can solve a lot of problems with a billion dollars. That’s why I believe it is our patriotic duty to adjust our tax withholding. We should be setting our withholding so it is as close as possible to our actual tax obligation.
Use a tax withholding calculator to help you figure out how much you should set aside from your paycheck. Your goal should be to receive a small tax refund or to pay very little in additional taxes at the end of the year. If everyone takes this very simple step to stop overpaying taxes, we will save over a billion dollars in unnecessary waste each and every year!
Automatic Savings Plans
If you need help saving money, you can “force” yourself to save without handing over money to the government. Here are several options that you can try.
- Split up your paycheck. Many employers can direct deposit your paycheck to multiple banking institutions automatically. You can have them send $250 a month to a credit union or a high-yield online savings account, while the rest of your salary goes into your checking account for spending. You can save $3,012 a year by doing this (high-yield online savings currently offer 0.75%).
- Set up automatic transfers from your bank account. Schedule the recurring transfers to occur on the same day your paycheck is deposited. This is a great way to start putting money away for an emergency fund.
- Fund a Roth IRA. Virtually every bank or discount broker that will host your Roth IRA will let you contribute to it on a monthly basis through automatic withdrawals. It’s never too late to start saving for retirement.
- Put it in a safe. I’d rather have you earn no interest on your money than pay the IRS to hold it for you. Plus, it’s always a good idea to keep some cash around the house in case of emergency. This especially applies if you live in a disaster prone area.
Talk to me, Goose.