By Jeremiah D. Pangan
It is that time of the year where many taxpayers have their hopes set high on receiving a sizeable tax refund. What many do not realize is that getting a tax refund actually sucks. Personally, I prefer that I owe the government because it means I underpaid them. What many taxpayers do not understand is that most of the tax refunds they receive are over payments of what they had already contributed to the system and it is not necessarily “free money.” Most of us taxpayers believe that getting a big refund means that the money they are about to receive is free money from the government.
The primary reason why getting a massive tax refund is a disadvantage is because you are basically loaning to the government interest free, the hard-earned money you worked for throughout the whole year. Let me put this in layman’s terms – you, as an individual, just acted as a bank and loaned your own hard-earned money, to the government, with ZERO interest! The government is keeping this money, using it, and then writing you a check when they are done with it. Whereas, if you had kept your own money and invested it in an index fund, mutual fund or stock, with the possibilities of higher interest rates, you would have effectively been making money for yourself.
Here is why it makes sense to get a lower refund; suppose you invest $225 per month of withholdings to the IRS, your money would get no rate of return or growth. However, the Rule of 72 or what is commonly known as the “Banker’s rule” states that if you invest $225 per month into an index account, mutual fund or a stock that grows at a 10% rate of return, your money will grow to $52,000 after 10 years. Why use $225? According to the Internal Revenue Service (IRS)1, average taxpayers get a refund of $2,700. It means that average taxpayers overpay in the amount of $225 per month to Uncle Sam. You can instead use this money for many productive things such as building an emergency fund, paying off a high interest rate credit card, building an individual retirement plan or contributing to your retirement plan at work.
April is Financial Literacy Month and it is the best time to learn why those receiving the smaller tax refunds are WINNING! and those with the whopping refunds shouldn’t be too ecstatic…(I’ll explain this further in my next blog entry) But in the meantime, To learn more about how you can make the most of your money or get your tax preparation done before the April 18, 2017 deadline, visit our website at www.icontaxgroup.com or give us a call at 877.778.1770.