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The Case Against a Federal Income Tax Refund

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Millions of Americans celebrate receiving an income tax refund each year.  Many of these same people live each month under the burden of financial hardship, struggling to make ends meet, often falling behind on living expenses and debt obligations.

The February poll hosted on the National Foundation for Credit Counseling (NFCC) website revealed that a significant majority of respondents, 58 percent, intentionally plan to always receive an income tax refund, unnecessarily allowing Uncle Sam the use of their hard-earned money, only to have it returned to them without benefit of interest.

Not only is the American taxpayer self-inflicting financial pain, they are doing so with intentionality. It boils down to a simple choice of determining if it’s more important to have extra money in their pocket each month or once per year.

The average income tax refund in recent years has been in the $3,000 range, or approximately $250 per month.  For many people, that amount can mean the difference between financial solvency and financial distress, yet they continue to have too much money deducted from their paycheck month after month.  Further, although well-meaning, many who receive the refund don’t spend it wisely, and even for those who do, once the money is gone, the cycle of struggling to responsibly pay monthly bills begins all over again.

Many consumers argue in favor of an income tax refund saying that it is a forced savings.  That is correct, but there is a better way to save.  The NFCC advises consumers to implement the following three-step program when they receive this year’s refund:

  1. Put this year’s refund into an interest bearing savings account. Upon receipt of the refund, seize the opportunity to establish an emergency savings account.  This will protect against the financial unknown and create a position of financial stability.
  2. Adjust W-4 withholding allowances. Although receiving a refund is not a good idea, no one wants to end up owing the government, either.  To determine the correct number of withholding allowances, use the worksheet at www.IRS.gov, then submit the revised form to your employer.  Know that changes such as the birth of a child, a death, or divorce may impact the number of necessary deductions, thus requiring further revisions.  An adjusted form may be submitted at any time during the year.
  3. Responsibly allocate additional monthly income as appropriate.  Now that the money that was going to the government is coming to the consumer in the form of a larger paycheck, it is his or her responsibility to make smart decisions regarding how to spend it.  Make it a priority to keep living expenses, the rent or mortgage, utilities, and insurance premiums current.  The next most important payment is any secured loan, for instance a vehicle payment, followed by unsecured debt such as credit cards.  If the savings account has been tapped, replenish it. 

This system stops the dependency on an income tax refund, establishes savings, and provides additional money each month in order to remain financially stable.

Since worker’s paychecks are smaller this year due to the Social Security deduction having been increased to its former level, it becomes even more critical that consumers find ways to increase their disposable income.  For those receiving a refund, adjusting withholding allowances is an easy and effective way to put more money into their pockets each month.

For help breaking your dependency on an income tax refund, reach out to an NFCC Member Agency trained and certified counselor.  To be automatically connected to the Agency closest to you, dial (800) 388-2227, or go online to www.DebtAdvice.org

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Contributor

Gail Cunningham serves as vice president of membership and public relations for the National Foundation for Credit Counseling (NFCC), Inc. based in Washington, D.C. During over two decades in the industry, she has provided one-on-one financial counseling to thousands of consumers, and reached tens of thousands more through hosting television shows related to consumer education on cable and network television, as well as writing a weekly financial education column that appeared in multiple newspapers and online sites. She has been a featured financial expert for the nation’s top media outlets, including: NBC Nightly News, Good Morning America, the New York Times, the Washington Post, CNN, National Public Radio, USA Today, Newsweek, Forbes, Smart Money, MSN Money, Bankrate.com, the Associated Press, FOX Business Network and Bloomberg News.

National Foundation for Credit Counseling

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