This column needs to be written and disseminated at least
once a year, and this is the ideal time to do it. Unfortunately, for most of us, this is the only time during the
year that we bother to think about our income taxes, and then only because the
day of reckoning is fast approaching.
Most of you, my readers, are close to or in my age bracket,
so the opportunity I'm going to present might not fit your circumstances. However, we all have children and grand
children who can benefit from the advice I'm about to give. Send or print out this column for them to
read and you'll be helping them immensely.
I use both TaxACT™— and Turbo Tax to prepare my taxes, and
both send me emails all through tax season to "file now and get your
maximum refund." Well, I am not
getting a refund, so why would I file any earlier than the last week around
April 15? Of course, I also noticed
that the in-store tax preparers are, as always, hawking their "maximum
refund" and "Get your billion back" ads on TV. It flies in the face of logic, but I suppose
it does attract customers. Here is my
opinion on tax refunds.
Approximately 136 million federal tax returns were filed for
the 2014 tax season, the one that covered the year 2013 and the latest year for
which the numbers are available. Of
those returns, over 102 million - 75% - of the filers claimed tax refunds. The average refund claimed for those 102
million returns was a shade under $2,700.
That translates to a whopping $275 billion in over-withholding in 2013
alone. If you don't believe it, here is
the
link to the statistics. To make this column a little simpler to understand,
I'm going to take the liberty to round off the refund amount to $3000.
I know these numbers are difficult to place in perspective
on an individual level, but let me put it this way: Taxpayers loaned the United States Government over
one-quarter-of-a-trillion dollars interest-free in 2013. Here is what that number looks like with all
the zeros - $274,700,000,000.
Experience has shown that we continued to loan that much or more in
2014, since the numbers have risen every year for the past decade.
Do you think the government spent that money, or did they
keep it in a lockbox so that the IRS could refund it to you when you filed your
taxes? Don't be too hasty with your
answer. Think about it on a personal
level. If I gave you $3,000 today with
no strings attached except that you would have to pay it back next year, what
would you do with it? Would you find some use for it, or would you put it in a
safe place, untouched, so that you could pay me back next year?
Now that you have (I hope) arrived at the same conclusion
that I have, I'll ask the next logical question. Why do we continue to loan all that money to the feds, whom we
know to be fiscally irresponsible, instead of keeping it for ourselves and
putting it to much better use in our own daily lives?
For instance, if you were to invest that amount in an IRA or
401(k) with a 5-percent annual return -- not hard to get in today's indexed
mutual funds -- over a 40-year work career, you would have a retirement nest
egg of over $350,000. And just think,
that's money that you aren't currently using at all, because you're loaning it
to the government on a continuous basis.
That's right, even though you do get a 'refund' every year, you are
still out the same amount from your current income tax withholding. It's a cycle that never ends!
Are you convinced that over-withholding of taxes to get a
refund at tax time is not a good idea?
If not, quit reading right here, because you will never learn anything
from the rest of this column.
Okay, to those of you who are still with me, my illustration
above is only one of many options as to how you could benefit from the extra
$125 in each bi-weekly paycheck you get.
It would be an instant raise in income to use as you see fit. And getting it is as easy as requesting and
filling out a new W-4 form, called a Withholding Allowance Certificate that is
available online or at your workplace.
The W-4 includes a worksheet for you to determine how many
exemptions you can take and how they will affect your take home pay. It allows you to fine tune your withholding
so that your deducted taxes during the year are approximately equal to what you
will owe on tax day. In fact, you should
try to be within $100 of your tax liability and the W-4 is the primary
instrument that enables you to achieve that.
Heck, I'll even give you this link to help you fill out the W-4. It comes from TaxACT™, an online tax filing
company and one you might choose to use when filing time arrives, but you're
under no obligation to do so. The
instructions are free for your use.
If you are self employed, or run your own small business,
you can achieve the same thing by downloading and using the 1040-ES, Estimated
Tax Worksheet and Scheduler. It will
accomplish the same goal for you. Here is a short video to
help you with that. It uses the 2011
Form 1040-ES, but these do not change from year to year so any one is adequate.
You might want to use both the W-4 and the 1040-ES if your
income during the year is earned in uneven patterns and amounts. For instance, you might buy and sell stocks
and bonds, or you take on seasonal employment to augment your income. Using both forms helps to fine tune your
withholding to get to that +/-$100 goal at tax filing time.
The side benefit of
changing your withholding to stay close to your actual liability is that
you will no longer be overfeeding the insatiable mouth of government. The behavior of our spendthrift Congress can
be muzzled if there isn't an excess of funds in the Treasury Department for
them to spend. You can help to reign in
those huge deficits and the fat national debt by merely submitting your new W-4
or 1040-ES and convincing others to do the same.
So, unless you dislike the idea of getting a raise in your
pay while helping to reduce the national debt, I suggest you take my advice and
submit that revised W-4 and/or 1040-ES post haste. And use the first enhanced pay to treat yourself to a night out
and dinner -- you deserve it for being smart enough to take the first step.
