Reading this article could be worth $3,000 dollars to you. A small, one-time change could add $250 to your monthly expendable income for the next year. But there is a catch: you’ll have to give up your annual tax refund.
You see, about 80% of Americans receive a federal tax refund, and the average refund is around $3,000. If you receive a tax refund, this is—like any other refund—your own money coming back to you. Effectively, you’re giving your money to the federal government and asking them to hang onto it for you, then give it back later.
I’ve actually heard people refer to their tax refund as a forced savings plan. The gist of this idea is that people aren’t disciplined enough to save on their own, so they entrust their savings, in the form of overpayment on their federal income taxes, to the federal government for safekeeping. To me, it seems a poor wealth strategy to entrust a savings plan to the same government that is the largest debtor in human history and runs a budget deficit losing hundreds of billions of dollars every single year.
What’s odd is that many people are happy about receiving a tax refund. Some people perceive their tax refund as an annual bonus of sorts, like a mini-lottery they win every year. What’s ludicrous about this is that it’s their own money coming back to them—not a government handout, grant, subsidy or charity.
Looking at it a different way, we discover that these same people lend their money at 0% for 12 months to Uncle Sam every year. When you factor in inflation, they actually get a negative return on investment on this loan.
So, instead of losing money every year on a tax refund, give yourself a small raise by adding that $3,000 back into your budget. How? If you’re an employee, ask your HR department and your tax advisor to help you change your W-4. The IRS’s Form W-4 allows you to choose how many tax withholding allowances you wish to claim.
With this approach, you pay less in taxes throughout the year and ideally submit a tax return where neither you nor the government owes the other any money. The more allowances you claim, the less money will be deducted from your paycheck—which means more net income for you. Be careful not to claim too many allowances, though, or you’ll end up owing the IRS next year. Your tax advisor can tell you how many allowances you should claim.
That’s it. With that one small change, you can put a little more control back into your financial plan and quit lending your money to a bankrupt, insolvent borrower at less than 0% interest.
This is hardly a sophisticated tax strategy, but it’s evidently one from which 8 out of every 10 Americans could benefit. And while it’s nice to put a little extra money into your monthly budget, small optimizations of your paycheckaholic income like this one are hardly the path to financial independence. For that, you really must start a business.
Want to make a real difference in your financial outlook? How about turning that $3,000 tax refund into one million dollars? One entrepreneur did exactly that. His secret? Hard work and yoga mats. Check out Episode 144 of Pat Flynn’s excellent Smart Passive Income podcast with e-commerce rockstar Ryan Moran and his step-by-step startup story of Zen Active Sports.
What would you do with that $3,000 throughout the year? Share your thoughts in the comments section below.
This article is strictly informational and does not constitute professional tax advice. Consult your tax advisor about any changes to your tax plan.