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Stop Making an Interest-Free Loan to the Government

From Inside Personal Finance

Some people actually look forward to tax time, because they expect to get a refund. They prepare their return, and then eagerly await their “windfall” of several hundred (or even thousands) of dollars.

If you’re one of these people, consider this: A refund means you overpaid the IRS. It means you gave the government more money than necessary to cover your tax liability. Last year, according to The Wall Street Journal, the average income tax refund was more than $1,300. Considering that the average income per household is only $41,000, that means Americans are giving the IRS 2% to 5% of their annual income for absolutely no reason.

Refunds are not gifts from the IRS; they’re simply the return of money that was yours in the first place. When you get a refund, it means you gave the IRS an interest-free loan for the year. Anyone else, even a bank, would pay you interest on the money. But not the IRS. It returns only the amount you overpaid, regardless of how much money you gave or how long you “loaned” it the money.

If you do get fairly substantial refunds each year, you’re probably claiming too few exemptions on your W-4s. Talk to a tax expert to make sure you’re claiming all the exemptions you can. Then, take the money you would have given to the IRS and use it to save for retirement, for college, or for some other purpose you deem acceptable.

Edelman Financial Services (EFS) does not provide advice pertaining to tax matters. Information regarding tax matters which may be provided by EFS is of a general nature only, and is not to be construed as constituting specific advice. Such information can be provided only by a tax professional and EFS recommends that individuals consult a tax professional for advice concerning tax issues.

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