On the occasional very special Thursday morning (ok, most Thursday mornings), the kids get to go to Cracker Barrel for breakfast with Dad. And on the very, very special Thursday morning (it’s actually only happened once), Lilly gets to take some of her own money and pick out a Chinese-manufactured toy from the Old Country Store.
Last week, she selected some garbage that I’ve already forgotten but the point is that it cost $4.28 and she paid with a five dollar bill, receiving 72 cents in change.
And for the entire ride home, she beamed about her purchase. Not the item that she’d selected, but the fact that they ACTUALLY GAVE HER SOME MONEY BACK! She said, “I like paying too much because I get a cool toy and they give me money.”
My initial thought about this absurd statement was, “Well, she’s only seven. She’ll eventually grow up and learn how money works and that they didn’t actually pay her to take a toy home.”
But then it occurred to me that this is actually how a startlingly large number of adults view their tax refund.
Your tax refund isn’t a windfall profit. It’s not a bonus that you earned for being a good American. It just means that you handed the lady at the IRS cash register a $10,000 bill when you only owed $9,300, and then she gave you $700 change.
If you’ve been guilty of thinking about your tax refund as anything other than getting your change back, you’re not totally at fault. The “tax industry” has been trying to brainwash you for years. Most of the marketing for companies like TurboTax or H&R Block looks something like this:
Sure, you want to file your taxes in such a way that you pay the absolute least that you can legally pay. But this kind of marketing warps the brains of average Americans and makes them think that the tax refund is a coveted financial status symbol.
I even know some CPAs who actually make sure that their clients pay too much in taxes throughout the year, just so that they’ll end up getting a refund. The theory is that the clients get psychologically tricked into thinking that their CPA is doing a great job because they always get a nice refund.
“I’ve been working with Gertrude for years and I always get a big refund, so she must be really good. I should refer all of my friends!”
No, all Gertrude did was tell you to pay $100 for a $92 meal and then convinced you that she’s a genius because the cashier handed you back $8.
When we’re doing tax planning for people, a helpful first question to get answered is “how much did you pay in taxes last year?”
More often than not, they’ll answer with something like, “we actually got $1500 back” or “we owed $200 or so.”
No, I couldn’t possibly be less interested in how much you owed (or got back) when you filed your taxes. That only tells me how much you overpaid or underpaid the cashier. I’m interested in knowing how much you paid.
There’s a really simple way to find the answer to that question. Grab a copy of that tax return that you just filed and take a look at line 24 on your Form 1040 where it says “this is your total tax.”
Then spend some time thinking about that number. Ask yourself, “Did I get that much value from my federal government last year?” If you paid $4000 in taxes, then the answer is probably yes. For a mere $4000, you were able to enjoy all of the freedoms associated with your citizenship while being protected by the finest military in the history of mankind. And you got to watch a couple of delightful presidential debates on network TV.
If you paid $35,000 in taxes, you might have overpaid for your share of that national defense. And you definitely overpaid for the debates.
But the point for now is to simply understand that the amount of your tax refund (or the amount you had to pay at tax filing time) tells us absolutely nothing about how much you actually paid in taxes. And the first step to good tax planning is understanding how much you’ve been paying and then strategizing the best way to reduce that amount in the future.
Or you can continue overpaying for your Chinese plastic from the Old Country Store and go on thinking life is good when they hand you back four dimes and a nickel.