With Tax Day fast approaching, many families are looking forward to getting a big fat income tax return from the IRS. Maybe they’re planning on using the extra funds to go on a well-deserved family vacation or to pay off the last of that credit card debt from Christmas. Maybe they’re going to invest in an IRA or simply use it as extra pocket money. Regardless of your intentions for your tax return, those extra funds may be less of a reason to celebrate than you might think. Here are a few little-known facts about the “extra money” you get back from your tax refund.
Large Income Tax Returns Are Essentially Interest-Free Loans to Uncle Sam
Although a large income tax refund may seem like a gift or money that has fallen into your lap, it’s actually money the government owes you. Your tax return is the accumulated amount of money the government withheld from your paycheck that should have gone into your pocket instead of to the IRS.
Each year, the government gets a 16-month interest-free loan on your income. Imagine what you could have done with that money if it had been in your checking account instead—not only would the money have worked for you, it would also have increased in value instead of losing value due to the inevitability of inflation.
What inflation means for the dollars you earned yesterday, but get back on Tax Day
Inflation refers to the constantly rising cost of goods and services in relation to the value of currency. Essentially, this means that purchasing a good or service in the future will cost more than the price of that good or service right now. For example, the Bureau of Labor Statistics has an inflation tool that shows $1,000 in 2016 has the same buying power as $1,025 in 2017.
That means I would need $25 more dollars in 2017 to purchase what I could have purchased in 2016. Taking this into consideration of your income tax return, this means you’ve lost $25 of spending power by giving that interest-free loan to the government. With the American income tax return averaging $2,800, that’s a lot of spending power that could have been used to yours—and your family’s—benefit.
Be Smart about Spending Your Return
Although it may be too late this year to avoid that big return, there are still steps you can take now to make sure you’re reaping the rewards of your hard work—and not Uncle Sam. Taking control of your finances is just a conversation away. Our team of wealth managers can help you develop a long-term strategy to grow and preserve your wealth. Schedule your free consultation today!