Announcement

Collapse
No announcement yet.

Zero Refund Mentality

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Zero Refund Mentality

    The really smart people around don't want a large tax refund. I have a few who do a good job manipulating their withholding such that their refund or amount due is very small. And of course, the financial advisors on the media tell people it's downright stupid to have much of a refund.

    We need to recognize the science of individual differences. There are several people (some are my clients) who broadcast their seeming intelligence all over town by saying "I ALWAYS have to pay! I don't let the government keep my money interest-free when I can put it in the bank and do better!"

    That makes their financial advisors happy, I suppose, and we all must admit that the math works. However, you often have to set up a dual between pure math and human nature.

    A scant few actually keep their refund/due close to zero. The overwhelming majority who bloviate their wisdom to the barber shop and night club patrons actually have a pattern. At year end, first I discover that there is nothing they have put in the bank to "do better." No 1099-INTs at all from anyone. In recent years, even if there were a 1099-INT it would be for a paltry sum. Then I discover these blowhards are grossly underpaid. The next chapter in the book?

    You got it! They start putting pressure on ME to reduce their liability so they won't have to come up with the money. They end up begging me to find a rabbit to pull outa the hat because they're flat broke and don't know where the money is coming from to pay their tax bill. I suggest increasing their withholding so next year won't find them in the same situation. They usually listen and even agree but rarely do anything. Next time I see them they are bragging out on the street about how they can "outsmart the govt by putting their money in the bank and making interest". You see them driving around town in a new $60,000 truck or buying their wife a Cadillac Escalante.

    And then there are those people who absolutely cannot save any money whatsoever. They commonly get back $3,000 or $4,000 or $5,000 and use the money for badly needed house repairs, college tuition for their kids, or buying a used car. These people can never save a lousy $10 a week no matter what. The tax refund is the only source of big money they'll ever see.

    I offer this as a sort of response to a recent thread where two elder people have heavy withholding on their social security benefits. Although I cannot forge an effective argument against the numbers, I can more often than not espouse the benefits of a large tax refund for MOST people, and would NEVER tell someone to reduce withholding unless the refunds were truly ridiculous.
    Last edited by Snaggletooth; 04-20-2014, 02:08 AM.

    #2
    Well said. My experience is exactly the same. Most people who brag about "not letting the government use their money" probably average about $13.11 in interest income, no dividends, and often have a 401k loan (assuming they are taking advantage of a 401k n the first place). And those with refunds (large or small) generally need the refund to pay some bills.

    If interest rates were in the range where it really mattered, I'd probably have more to say to people who have large refunds. But with a Mopey Market Account paying 1%, there isn't very much opportunity cost associated with using Federal Withholding as a Christmas Club account, assuming they do something smart with the refund once they get it. Assuming the feel they must reward themselves for they thrift, my suggestion would be to spend 1/4 to 1/3 of the refund on something frivolous and save or invest the rest. That way, they are getting some instant gratification while at the same time building a rainy day fund. (keeping in mind that the down payment on a motorcycle or boat is not a rainy day expense).

    (Incidentally, what may look like a typo above is not - it is intentional)
    "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

    Comment


      #3
      Yep.

      Originally posted by JohnH View Post
      Well said. My experience is exactly the same. Most people who brag about "not letting the government use their money" probably average about $13.11 in interest income...
      $12.97 here.
      If you loan someone $20 and never see them again, it was probably worth it.

      Comment


        #4
        Y'know it beats me what people do with their money. I've got lots of clients who, like yours, earn maybe five bucks interest a year, but at the same time take in maybe $50-80-even 100K a year in salaries and are always, always strapped for cash.

        In fact one retired couple (both about 68) whose combined pensions and social security are pushing fifty thousand tell me every year "I'll pick it up in two weeks when my check comes in." They're both tight and aren't living high so you'd think they would be rolling in dough, but no, they have to wait 'til the government eagle flies before they can pay my fee ($125).

        Comment


          #5
          I figure their W-4 for them. Explain that the consequences of both claiming "married" and if they don't turn in the W-4s. Its on them in the future.
          The majority of earners don't understand that claiming "married" already means two deductions, as does claiming "single-one".
          Believe nothing you have not personally researched and verified.

          Comment


            #6
            Then you got the ones living way above their means

            Originally posted by Black Bart View Post
            Y'know it beats me what people do with their money. I've got lots of clients who, like yours, earn maybe five bucks interest a year, but at the same time take in maybe $50-80-even 100K a year in salaries and are always, always strapped for cash.

            In fact one retired couple (both about 68) whose combined pensions and social security are pushing fifty thousand tell me every year "I'll pick it up in two weeks when my check comes in." They're both tight and aren't living high so you'd think they would be rolling in dough, but no, they have to wait 'til the government eagle flies before they can pay my fee ($125).
            I have a retired couple, AGI 120K, owed $4k and had me get an extension as they will have to take a withdrawal from retirement to pay. They owe on seven timeshares. I'm talking debt up to their eyeballs. For timeshares. Drive brand new cars. Debt there, too. I cannot get over the financial decisions people make.
            If you loan someone $20 and never see them again, it was probably worth it.

            Comment


              #7
              Most of my clients ask me to help them fill out their W4 and they generally come very close to their tax liability. For those that routinely get large interest or dividend income I make the necessary adjustments to account for that. I tell my clients who have a cash flow problem to keep between $500 to $1000 in a savings account to pay for balance due taxes if they get taxable income that was not accounted for when the W4 was done, such as gambling winnings etc.

              Then I have a handful of clients who will have extra taxes witheld to get that big refund that they treat as a bonus to pay for summer fun!
              Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

              Comment


                #8
                $43,797 is the average savings of a 50 year old American (per U.S. Census Bureau, Saperston Companies, Bankrate)
                The average American owe about $5k in credit debt with a 15% interest rate.
                It was just announced that last month 88% of GM new car loans are to high risk credit individuals.
                These are the people declaring that getting a refund is bad economics.

                If you are saving more than 10% of your income for retirement and are debt free, yes it's probably not a great idea to get a significant refund because you could find a better way to use that money. Otherwise, you are kidding yourself.

                Comment


                  #9
                  It is much easier to do without a small amount each month than to come up with a large amount. This is the reverse of an installment purchase. If you have a $5k refund and deposit into your IRA you have not really foregone anything during the year if you did not have the discipline to save that money and deposit into your IRA each month. One such smarty as you speak of has about $400k on their W-2 but will need an installment agreement to pay the $10k balance due on the return.

                  Financial literacy seems to be at a real low. I had a young single mom in this season that of course had a pretty good refund. I showed her how a contribution of $1000 to a traditional IRA would increase her refund by $1800 between the increase in EIC and the savers credit. It was late January so I explained she could claim the IRA contribution, file the return and put the money in out of the refund. She would have $1000 in her IRA she otherwise wouldn’t plus an extra $800 in her pocket but she couldn’t get her head around it. Very unlike her father who has been a mechanic all his life but will retire with pension income of $35k, SS Income and $700k in his 401K plan.
                  In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
                  Alexis de Tocqueville

                  Comment

                  Working...
                  X