AssetPreserver News

This is not tax season but the topic something to think about: is it good to get a large tax refund?

Against a big refund

Let’s examine the reasons a person shouldn’t get a big tax refund:

You are giving an interest-free loan to the government.

You are taking money out of your cash-flow. If you receive a refund, you’ve had extra money withheld from each paycheck. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not.

That money could be invested at a high rate of return. Not only does a tax refund give your money to the government interest-free, it also deprives you of the chance to earn a return on the money.

Loss of purchasing power – by getting no return on your money over the year, you lose purchasing power. In other words, what cost $1,000 a year ago costs about $1,021 today, depending on the inflation rate.

You are not paying less tax. Regardless of whether you owe or get a refund, the tax you pay is the same. Of course, if you owe too much, there is a penalty for underpayment of taxes.

Getting a large refund does not decrease your chances of an audit.

There are many people that will squander their big return.

Another advantage is the money you save, if you choose to automatically deposit it in an account is it in itself is an emergency fund.

For a big tax refund

The big check.

If you want the big check after April 15th, here are a few ideas:

One idea is to have the money that would normally go toward overpaying taxes and put it into a savings account or money market. Have it automatically withdrawn from your paycheck so you do not see it.

Put the money you would give the government into your emergency fund.

Pay down your high interest debt immediately.

Don’t forget that some states gave refunds in the form of an IOU.

If you do not want a tax refund

Adjust the amount of tax withheld from your paycheck so the amount you owe/get is as little as possible. Since each person’s situation is different ask your tax advisor on the amount withheld. If your income is through a W-2 form, all that is required is filing a W-4 form with your employer. You can do this any time of the year.

If you are self-employed, you can calculate the quarterly payments so the total you owe is minimal. Keep the money  in a fixed income account such as money market or money market savings account.

Some factions claim the tax credit is working well; evidence speaks otherwise.

The $8,000 tax credit is (from the IRS web site):

The credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

The IRS is now investigating and prosecuting people who are falsely claiming the tax credit. It is estimated that over 100,000 claims are fraudulent.

At calculatedriskblog.com is an interesting calculation on how much the taxpayers are getting tagged for the tax credit:

NAR (National Association of Realtors) estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand, and the program cost $43.4 thousand per additional buyer. The actual number could be much higher if there were fewer additional first-time buyers than the NAR’s estimate – or if the overall cost is higher (more buyers claiming tax credit).

The $15 billion dollar price tag is twice what Congress planned.

I have always believed that if $8,000 separates you from buying a house then you cannot afford the house anyways. Given the costs associated with home ownership, $8,000 will go very fast. So I am leery of the long-term effects of the taxpayer gift. I also believe first time buyer home prices have been inflated just like cash for clunker car prices were inflated by many dealerships.

Do you think the tax credit is worth it?

Just a test to see if I can post to twitter.

One of our favorite ETF resources is now defunct. etfconnect.com has morphed itself into cefconnect.com which is closed-end funds only. etfconnect handled etfs and cefs.