It’s always interesting this time of year to talk with people who just can’t wait to receive their tax returns.  They eagerly check the mailbox each day, impatiently waiting for that last W-2 or 1099 so that they can plug in the final numbers, file their tax return, and wait for the money to roll into their bank account.  People plan trips and major purchases around this magical time of year when Uncle Sam sends them money.  But is this really something that we should be excited about?

In 2007, the average refund (received in the spring of 2008) was $2429, up more than $100 per taxpayer from the 2006 tax year.  So far, 2008 tax refunds average $2869, an 18% increase over a year ago.  This number is higher due to a couple of factors, including smaller capital gains taxes for most investors, higher contribution limits for IRAs, and new tax credits for homebuyers.

It’s important to realize that when the government pays you a tax refund, all they are doing is returning money that you paid throughout the year that was more than you really owed in taxes.  If you receive a tax refund of $2400 for example, that means you gave the government a loan of $200 a month that they are returning to you without any interest.  Most people could find something to do with an extra $200 a month, especially in an economy like this.   Many taxpayers were busy piling up more credit card debt or falling behind on mortgage payments, all the while giving money to the federal and state governments unnecessarily.

In addition to giving the government an interest-free loan, millions of taxpayers pay extra fees and interest for getting an advance on their tax refund because they can’t wait an additional few weeks to get their money back.  Companies willing to make these “refund anticipation loans” brought in over a billion dollars in fees and interest when filing 2007 taxes for taxpayers.

Your goal in paying your taxes should be to have an amount withheld from your paycheck that is close to what your tax obligation actually is.  Your accountant can help you to figure out what that number is for you, and your employer will allow you to complete a new W-4 form to adjust the amount that is withheld from each paycheck.  If you get a big refund each year, consider reducing the amount that is withheld from each paycheck and keep more of your money in your bank account, where it belongs.

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Tags: 1099, credit card debt, Loans, tax returns, taxpayers, w-2

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