How Tax Refunds Can Keep You From Being Rich

I sometimes talk with people who say they are getting a tax refund. One person said “I don’t want to take ANY deductions on my W-4 because I count on a big tax return every year to pay my bills’.

I can relate. When I was younger, I received a tax refund of $2,627. WooHoo!

Maybe not. I’ll show you why you don’t want a tax refund.

But I love my tax refund!

Hold on, I know what you’re thinking – I love my tax refund. We can use it to go on vacation. Buy some new furniture. Put it towards a new car!

Let’s pretend for a minute you’re getting a $1,000 tax refund. Or better yet, replace the amount of $1,000 with the largest tax refund you received over the past five years. Now answer this question for me:

Will you please, today, right now, write me a check for $1,000? On April 15th of next year, I promise to pay you back the amount in full, with no interest.

No, no, no! Why on earth would you give me an interest-free loan? You wouldn’t right?

But wait a second – according to the IRS website, in 2014 the average tax refund was $3,034.00

Instead, how about you write me a check for $3,034.00 today. On April 15th of next year, I promise to pay you back the amount in full, with no interest.

You’ll be surprised that millions of Americans do this EXACT same thing year after year after year. They give the government an interest-free loan.

But you don’t have to.

My big fat tax refund

I mentioned earlier the largest refund I ever received was $2,627.  My refund was so large because I just bought my first home and had the home mortgage interest deduction.

I had let the federal government borrow, tax-free, $218.91 EACH MONTH.  That’s money I couldn’t use towards getting out of debt, saving for the future, or building wealth.

What could you do with an extra $218.91 a month?

How much faster could you pay off the balance on your credit cards? Your car? Your mortgage?

I need that tax refund!

But wait a minute Scott, I use my tax refund for …. (fill in the blank).

The truth is most people blow their tax refund on stuff. Let’s take a vacation to Florida where it’s warm! Or if you are already in Florida – let’s go skiing!

Getting out of debt and saving is accomplished by taking the money you let Uncle Sam borrow for free and applying it each month to paying down debt, building an emergency fund, or investing.

I know – these just aren’t as sexy and fun as going on a vacation. But there is nothing sexy and fun about being broke all the time either – is there?

And there is certainly nothing sexy and fun about loaning money for free – when you don’t have to.

If I had a million dollars – oh wait, you can

Remember the IRS said the average American got a refund of $3,034 in 2014. That comes out to $252.83 each month the average person is loaning the government interest-free.

If you took that money each month and invested it in a Roth IRA earning an 11% rate of return, in 10 years you would have saved $54,866.63. That’s a lot of vacations.

In 33 years, you would have $1 million, tax-free. That’s a lot of vacations. You could travel around 11 or 12 times for that much.

You’re not a bank, right?

I didn’t know how NOT to give the government a tax-free loan until a couple years after becoming a personal bank to Uncle Sam. You and I don’t want a refund, and we don’t want to pay any extra on April 15th.

The amount you owe on your taxes should be zero.

The amount of your refund should be zero too, so you can keep your extra money every month.

YOU should earn the interest on YOUR money, not loan it out for FREE.

How would you like to see your paycheck increase next week?

This is one of those things you don’t want to procrastinate about. Your next paycheck is coming up fast. Finish reading, then get to work. It’s not that hard, I promise. It might take you 20 minutes.

You can get an estimate of how much you can save by using the withholding calculator at Once you use the withholding calculator, you will need to fill out a new W-4 with your employer to have the correct amount withheld from your paycheck.

You filled out a W-4 when you first started working wherever you are currently employed. It’s time to fill out a new one and start keeping your money.

That’s all there is to it – you tell your employer you want them to take fewer taxes out of your paycheck each week. If you do this, you will no longer be overpaying each week on your taxes.

You will have more take-home cash by your next paycheck if you adjust your withholding properly today. More bucks. More moolah. More coin.  In your pocket.

Here’s a trick I learned

If you use the withholding calculator it may give you the same number of withholdings as you currently have. If you got a tax refund last year, increase the number of withholdings by one or two.

This is exactly what I did to bring my refund / taxes due close to zero.

Is this legal? Yes.
Is this easy? Yes.

The following years after I increased my W-4 withholding I had tax payments due of $201 and $71. That’s pretty darn close to zero, and I wasn’t giving Uncle Sam an interest-free loan anymore. Sweet!

It’s not an exact science to get to zero. What you don’t want to do is increase your withholding by 4 or more because you could then end up underpaying your taxes and have taxes due.

Ask the experts

You may want to contact your local tax preparer today to determine any adjustments you need to make to your W-4.

  • If you’re getting big refunds, talk with a tax expert.
  • If you are moving from an apartment into a new house with a mortgage payment, talk with a tax expert.
  • If you just had another child, talk with a tax expert.
  • If you just got married or divorced, talk with a tax expert.

Any type of big life changing event should result in you talking with a tax expert so you can keep more of your paycheck.

Are you with me? Please look into this. There is no reason to loan out money for free to the IRS.

You’ll look like a wall street insider when your tax overpayment and tax owed are zero every year.

Question: Did you get a big refund last year or know someone who did? Please share this post on Facebook and get the word out. Let’s stop lending the government money for free.

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