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by Damon Carr
Tax time is upon us. This is the time when Uncle Sam mandates that we reconcile taxes that were collected throughout the year by way of payroll withholdings and estimated payments to see what’s rightfully due to the IRS. This year individuals have until April 15 to get their tax return prepared and their tax liability paid or suffer the consequences of penalties, interest and/or the wrath of the IRS.
Many people are eagerly anticipating the largest lump sum check they’ll receive the entire year. This check is the result of a tax refund. If you’re expecting a large tax refund this year, I’m sure you can’t wait to get your W2s, 1099s and all applicable tax forms so that you can file your tax return and get access to your refund. This is the time of the year when friends and relatives will proposition you to let them borrow some money until they get their tax refund.
After running up balances on credit cards and spending more than what was budgeted for during holidays, a tax refund or some financial windfall of any kind would be appreciated by all. Tax time can be considered the day of reckoning. This is a time when you come face to face with the amount of money you earned throughout the year, then suddenly gasp, wondering where all your hard-earned money went.
Would you lend a close friend or relative money at a 0 percent interest rate and no payments until next year? Would you pay fees to get fast access to money rightfully owed to you? Would you pay additional fees to cash a check to gain access to your money?
When spoken in these terms, I’m sure that most of us would answer the above question with a resounding NO! Yet, this is exactly what millions of people do each and every year. They lend Uncle Sam money with a 0 percent interest rate. They pay astronomical fees and interest for refund anticipation loans. These loans give them access to their refund within minutes or days as opposed to the IRS turnaround time, which is two to eight weeks. They then take these refund anticipation loan checks to check cashing companies or corner stores and pay even more fees to cash these checks.
In the past, I would ridicule tax preparation companies who aligned themselves with third party organizations that offered various high cost products and services. After taking a closer look at their business model, I came to the realization that if they did not offer these products and services, most of their clients would take their business elsewhere. People want their money and they want it now.
Considering the fact that 78 percent of American households live paycheck-to-paycheck, you can understand why people need to have access to their money as soon as possible. When you factor in the fact that the average American saves less than two cents for every dollar earned, you begin to understand that money received during the tax season represents the only form of savings the typical American does on a consistent basis. Because of this reality, I’ve always been hesitant to suggest a way that millions of people who are in need of extra money can access their hard-earned money each and every paycheck versus once a year during tax season. For if they followed my advice without an ironclad financial plan, I fear that the extra money in their paycheck will be absorbed, spent and be unaccounted for. Only this time there will be no tax refund to serve as a bailout.
We can continue this “little man can’t get ahead” mentality of managing our money or we can become more responsible and begin to make our money work just as hard for us as we work for it. I encourage you to stop lending interest-free money to the IRS. Stop opting for high cost rapid refund anticipation loans. Stop cashing your refund check at check cashing companies and corner stores that charge high fees. Doing these things creates a negative rate of return on your money. I encourage you to start making smart money moves with your money. Give yourself a raise! Increase your paycheck and reduce your refund by modifying your W4-Form withholding certificate with your employer. The IRS welcomes this advice.
According to the IRS website, the IRS collected more than $4.9 trillion in gross taxes in 2022 and issued almost $647 million in tax refunds. The IRS processed more than 262 million federal tax returns in 2022. Nearly 203 million or 78 percent of all returns and other forms were filed electronically. The IRS would prefer you come close to breaking even on your tax return, for it’s an administrative nightmare to process hundreds of millions of tax refund checks each and every year.
This tax year when you receive your tax refund, use it to establish a solid financial game plan to help you get a grip on your money: Pay off some debt. Start an emergency savings fund. Start saving for vacation or large purchases. Stash some money away in a Section 529 college savings plan or Coverdell Education Savings Account for your child’s college education. Set aside some money for your future in a tax advantaged retirement savings vehicle such as an IRA. Doing so can reduce your taxable income which can increase your tax refund.
If you aspire to have a better handle on your money, I encourage you to seek “tax shelters,” not “tax refunds.”
Here’s how you can access your money today versus next year:
Form W4 withholding certificate. This form instructs your employer on how much to withhold from taxable wages. Remember that exemptions and withholding allowances are not the same. You may be entitled to additional withholdings if you qualify for various deductions and/or credits.
Receiving your money throughout the year and managing it wisely is the true definition of a “rapid refund.”
(Mony Coach Damon Carr can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com.)
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