Why a High Tax Refund Doesn’t Payoff

Why put off to tomorrow what you can have today? A high tax refund at year’s end can be a poor choice for many, because inflation devalues a government refund of your own money. Aside from the threat of scams, there are four main reasons to beware of high tax refunds.

4 reasons to beware of a high tax refund

• Inflation

Inflation, a process of continuously rising prices, or a continuously falling value of money, means is a dollar today will be worth less than a dollar tomorrow. The longer you wait for your money, the less it is worth when you get it.

• Interest-free loan

A high tax refund could be considered an interest-free loan to the government. All year long, the government is free to do whatever it pleases with all the surplus money drawn from taxpayers. On this money, the government pays no interest. Your money, which you could have invested, is returned without gains.

• Spending spree

Many people plan big purchases around their year-end high tax return. Others, treat themselves to something nice with “found” money. Experts say that if people receive money in small increments they are less-likely to spend frivolously.

• Why wait?

If you are struggling to make ends meet, any little bit in your paycheck helps. Don’t wait till next year to get your high tax refund if the money will make a difference to you today.

A good goal to shoot for is to receive as close to a zero refund as possible. If you normally receive a high tax refund, try adjusting withholdings on your W-2 form.

High tax refund scam alert

If a promise of a high tax refund sounds too good to be true, it just might be, according to a recent warning issued by the IRS.

Among the IRS’ annual Dirty Dozen list of tax scams is a false promise of an abnormally high tax refund. In some cases, scammers pose as tax preparers. In other cases, tax-payers fall victim to unscrupulous accountants.

“Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund,” said IRS Commissioner John Koskinen.

With flyers, advertisements, phony store fronts, scammers prey on unsuspecting tax-payers, including low income individuals, the elderly or those who don’t speak English. These con artists charge excessive fees and promise fictitious rebates, benefits or tax credits.

If you have any further questions about whether a high tax refund is right for you or any other accounting questions, please feel free to call DeFreitas & Minsky at 516.746.6322