By: Andrew Rosen, CFP®, CEP® It’s that season again. I’m talking about Tax Return season. If you’re like me, you frantically gather all those tax documents and await the day where you dump the mess into your CPA’s lap.  “Good luck,” you say, then cross your fingers and hope you don’t get the unpleasant surprise of owing money. (That’s the worst!) Is this familiar? I realize many of us get excited when that tax software spits out a nice fat four digit refund (instead of a bill).  Don’t get me wrong, it sure beats a stick in the eye; however, getting a tax refund isn’t an ideal situation.

Why I don’t like refunds.

Let’s breakdown what actually happens when you get a refund, to best understand why refunds aren’t ideal. First, we must shoot down the common misnomer. The government is not rewarding you for being such a good citizen. Nor do they say, “We have all this extra money, let’s just give it back to these nice people.” In most cases, what actually happens is throughout the year you’ve kindly given the government your money. That’s right! What you’ve done is advanced the government an interest free loan on your dollars for an entire year!  Does that sound like a good strategy? What does the government give you in return for borrowing thousands of your dollars? Unfortunately, they give (as my mother would say) bupkis (AKA nadda, nothing, zilch). I know what you are thinking: that’s OK right? I’m sure they’d extend the same courtesy to me.

Wrong! The government charges approximately 5% for late payments. Thus, instead of earning two percent (or more) in a high yield savings account, you are lending the government funds for free.

This leads us to the million dollar question: why are we so excited to get our hard earned money back with no interest? Stop doing it. It’s time to plan smarter.

What can you do?

Most of us have fairly predictable incomes. Even a variable component (such as your bonus) is generally given early in the year. If you are receiving a sizeable refund, that means you are typically over withholding from your paycheck. Those withholding rates are easy to calibrate. Doing so will help you to come out a little more even at tax time. Additionally, I would sit down with your tax professional and financial planner to get a sense of what the year will look like. Review your incomes and deductions. In an ideal world, these two professionals work together on your behalf. (This is one of the reasons Diversified brought in an in-house CPA.) This allows adjustments to minimize refunds. I recommend doing this early in the year and then once more somewhere mid-year to third quarter as things playout. It’s also smart to create a little slush fund in case you end up owing money, instead of scrambling to get funds at the last minute. Again, I come back to that high yield savings account. I think it’s a good way to protect against this scenario. And, if you don’t need those funds, then rest assured that they are growing. It sure beats giving the government an interest free loan!

The Tax Man.

I, for one, am not a fan of giving free money to the tax man! I suggest trying to get this formula right, even if it’s difficult to do and nearly impossible to be exact. But, with good proactive planning and the right team in place, it’s something a firm like ours can help mitigate.    
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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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Financial planning and Investment advisory services offered through Diversified, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC .  Associates of Diversified are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.