Monday, April 14, 2014

IRS enjoys another year of interest-free loans from taxpayers

Washington State Capitol Building - Olympia, WA
Washington State Capitol Building
With tax day fast approaching, taxpayers continue to provide the United States government with interest free loans.  According to the Internal Revenue Service, 77% of tax returns result in a refund check, and in 2011, the average refund was close to $3,000.

Most Americans receive a refund on taxes because they overpay the government throughout the year and receive the over payment back in the form of a refund.  Everyone loves a refund, but not when it’s money you should have kept from the beginning.  Imagine visiting your local grocery store to buy a gallon of milk for $3, but paying $50 instead, and getting the $47 difference back a year later.  Getting your $47 back is not nearly as exciting now.

By having the government withhold less throughout the year, you’ll receive more money on each paycheck.  As a good reader, you should invest this extra amount throughout the year to earn a decent return.  By investing in an index fund such as the S&P 500, you could earn 11% for the year or roughly $330 (from 1950 through the end of 2009, the average S&P 500 return was 11.0% a year).

Ideally, your tax return should result in a payment owed of slightly less than what would trigger a penalty charge.  If you receive a sizable tax refund each year, re-visit the W-4 form to ensure that the government is withholding the appropriate amount.  By filling out this form at the beginning of each tax year, the government should withhold the correct amount, minimizing your tax refund and thereby increasing the funds that you have to invest throughout the year.  Happy tax season!