I recently had a conversation with someone in regard to the reason they choose one Presidential candidate over the other. The first thing they mentioned was that under the current President, the amount of their income tax refund was lower then previously. So, one of the reasons they voted for the other candidate was because they believed they would go back to having a larger refund at the end of the year.
Sadly, many Americans view refunds in the same way, as if they are some magic bonus that we receive just for being good people. In reality, if you receive a tax refund, it just means that you were punished for the entire year. The larger your refund, the more you were being punished.
A tax refund is nothing more than the government saying, “Thank you for the interest free loan for the last year, here’s your money back.”. The refund represents YOUR money that the government held on to because you were taxed too much. Here’s an oversimplified example:
Let’s say you make $1000 per week. The government thinks you’ll be in the 25% tax bracket, so they take $250 a week out, and you go home with $750. At the end of the 52 week year, you have paid $13,000 in taxes, taking home $39,000. Along comes tax time. You fill out your taxes and after all your other deductions and credits, your taxable income is $45,000 and your tax rate is actually 22%. This means you should have paid $9,900 in taxes. Congratulations! You’re getting a $3,100 refund.
As you can see, what you’re celebrating is that the government took over $3,000 from you, held onto it, and now is giving you your own money back with no interest. That’s $3,100 that could have paid off bills, bought food, cut down credit card debt, etc. If you truly enjoy giving interest free loans for a year, I’ll be glad to take you up on that offer as well.
Ideally, you want to have your refund be as little as possible, or even better, owe the government a little instead. When you owe, you turn the tables. It means you’ve held on to the money for a year, collecting the interest for yourself instead.
So to my friends who voted for a larger refund, what you actually voted for was to have more money taken out of your pocket throughout the year.