Artwork for podcast Enjoy More 30s: Family Finance
Tax Refunds Are Bad (Whaaat?!) | Series 4.3
Episode 326th July 2021 • Enjoy More 30s: Family Finance • Joseph P. Okaly
00:00:00 00:11:34

Share Episode

Shownotes

How could a big check from the government at the end of the year be a bad thing?

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC. TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcripts

Voiceover Audio:

Welcome to The Enjoy More 30s Family Finance

Voiceover Audio:

Podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

that tend to weigh on us stress us out and distract our focus

Voiceover Audio:

from simply enjoying life.

Voiceover Audio:

Hello and welcome to the third episode here of the Your Major

Voiceover Audio:

Money Misnomers Series. We are on the Enjoy More 30s Family

Voiceover Audio:

Finance Podcast here where we're trying to help provide young

Voiceover Audio:

families with information to better their lives and make it

Voiceover Audio:

more enjoyable. As always, if you like what you hear, please

Voiceover Audio:

make sure to subscribe or follow us on Apple podcasts or wherever

Voiceover Audio:

you listen. Clicking a star leaving a review really helps us

Voiceover Audio:

out helps to find other families out there that can we can

Voiceover Audio:

connect with and help provide this advice to as well. Last

Voiceover Audio:

week, we discussed packing for the right financial trip, and

Voiceover Audio:

the three basic financial questions to help you filter out

Voiceover Audio:

a lot of that advice that everybody's going to come across

Voiceover Audio:

and make sure it's relevant to you, and what you should be

Voiceover Audio:

working into your actual plan.

Joseph Okaly:

Today's episode is Tax Refunds Are Bad - Whaat!? -

Joseph Okaly:

right, that's the initial reaction - whaat!? - but we're

Joseph Okaly:

going to cover what you need to know when it comes to

Joseph Okaly:

understanding what a tax refund actually means, and what you can

Joseph Okaly:

do to change that amount you may be receiving, if I can convince

Joseph Okaly:

you that they aren't the best thing to be receiving large

Joseph Okaly:

amounts of.

Joseph Okaly:

Now it's funny how your views of things seem to change. As you

Joseph Okaly:

get older, you may have experienced this too. I'm

Joseph Okaly:

recording this episode right now in the heat of the New Jersey

Joseph Okaly:

summer, it's like 95 degrees outside or something like that

Joseph Okaly:

today. And if I was all the way back in high school, I would not

Joseph Okaly:

be inside. I would be at the beach with the sole goal of

Joseph Okaly:

trying to get tan. Getting some sun, getting some vitamin D,

Joseph Okaly:

obviously not all a bad thing. But I can tell you right now I

Joseph Okaly:

was 100% not doing it for that vitamin D. I wanted to just look

Joseph Okaly:

good. So as you may think back to your early days, maybe you

Joseph Okaly:

can relate with me in this. Now we've all seen kind of, you

Joseph Okaly:

know, those people that live at the beach, their skin is so dark

Joseph Okaly:

and wrinkled, that we really do clearly know excessive sun

Joseph Okaly:

exposure - not exactly good for us or our skin! I'll go as far

Joseph Okaly:

as to say intentionally exposing ourselves to radiation so our

Joseph Okaly:

bodies turn tan is a little bit odd if you really want to think

Joseph Okaly:

about it like that. Now we fast forward over to today. I don't

Joseph Okaly:

hide under a sombrero or anything like that. But I don't

Joseph Okaly:

also anymore go out of my way to try to just get as tan as

Joseph Okaly:

possible. On the contrary, in a somewhat ironic twist I guess

Joseph Okaly:

you could say, I instead spend my time chasing my kids around

Joseph Okaly:

trying to keep them lotioned up and have hats on their heads, so

Joseph Okaly:

they don't get too much sun.

Joseph Okaly:

So what you need to know about tax refunds is that, like the

Joseph Okaly:

summer sun, a little bit is fine, but you don't want to

Joseph Okaly:

overdo it by any means. Imagine I gave you the phrase "tax

Joseph Okaly:

refund", right, on a piece of paper. So imagine a piece of

Joseph Okaly:

paper the word tax refund is written on it. And I said you

Joseph Okaly:

have to either take this word or these two words and put them

Joseph Okaly:

into a column on the left that says good, or a column on the

Joseph Okaly:

right that says bad. Where do you pick yourself putting that

Joseph Okaly:

phrase tax refund? You're probably going to move it over

Joseph Okaly:

to that left hand column, right, into the good column. The thing

Joseph Okaly:

about tax refunds is that it's someone giving you your own

Joseph Okaly:

money back. Let's say someone slipped a $20 out of your wallet

Joseph Okaly:

and then gave it back to you. It wouldn't exactly be something to

Joseph Okaly:

you know, celebrate, right? You wouldn't feel that great about

Joseph Okaly:

it. With a tax refund, no one's slipping it out of your wallet

Joseph Okaly:

except for you. You're slipping it out of your own wallet and

Joseph Okaly:

giving it to the government. Let's say that you make $100,000

Joseph Okaly:

and you have your employer withhold 20% for taxes. So that

Joseph Okaly:

is $20,000. When your accountant does your taxes at the end of

Joseph Okaly:

the year, they are calculating what you actually should have

Joseph Okaly:

paid in taxes for that entire year compared to what you

Joseph Okaly:

actually paid. So let's say they calculate $18,000 is what you

Joseph Okaly:

should have actually paid. In this example, you actually paid

Joseph Okaly:

$20,000. So you receive a $2,000 refund. They gave you back that

Joseph Okaly:

$2,000 of your own money. People often say things such as like,

Joseph Okaly:

"I have a great accountant, they always get me a big refund".

Joseph Okaly:

Assuming you have an accountant though, who's following the

Joseph Okaly:

rules, they're really all just solving this math equation. And

Joseph Okaly:

they should all come to the same answer really. How much did you

Joseph Okaly:

pay in taxes compared to how much should you have paid in

Joseph Okaly:

taxes? That's really it.

Joseph Okaly:

Now you may be saying to yourself right now, you know,

Joseph Okaly:

Hey, Joe, what's the big deal? So I get a large refund. Why is

Joseph Okaly:

that a problem? The problem, from a financial standpoint at

Joseph Okaly:

least, lies in the fact that you're giving an interest free

Joseph Okaly:

loan to the government. You're saying "hey guys, here take

Joseph Okaly:

$10,000 of my money. No, no, don't worry, you don't have to

Joseph Okaly:

pay me anything, just give it back to me in like six to 12

Joseph Okaly:

months". So that $10,000 refund every year, that's money that

Joseph Okaly:

you could have had during the year invested in doing something

Joseph Okaly:

for you. Let's say on average, you had that money in your

Joseph Okaly:

paycheck during the year. And just for this example, say that

Joseph Okaly:

you were able to invest it and earn an extra 5% that you now

Joseph Okaly:

missed out on. So that might be say, $500 a year, you're missing

Joseph Okaly:

out on in that example, which adds up over time.

Joseph Okaly:

Taking it even further, some people that are tight from a

Joseph Okaly:

cash flow perspective. So if you are a little bit tight month in

Joseph Okaly:

and month out, but you get a big refund at the end of the year,

Joseph Okaly:

you're really just compounding that problem. Maybe there's

Joseph Okaly:

credit card debt that's building up. The less you're overpaying

Joseph Okaly:

the government during the year, the higher your paycheck then is

Joseph Okaly:

going to be as a result. So if you stop paying them an extra

Joseph Okaly:

$1,200 a year that you're just getting back at the end of the

Joseph Okaly:

year, your paycheck will now be $100 a month higher. So that can

Joseph Okaly:

really help out a lot of people. And if you're having to put

Joseph Okaly:

money on credit cards, and then you're just trying to pay them

Joseph Okaly:

off at the end of the year with the refund, you have 15 to 20%

Joseph Okaly:

probably in credit card interest that's building up, that doesn't

Joseph Okaly:

have to if you just lowered your refund, your paycheck would be

Joseph Okaly:

larger, and then maybe you wouldn't have to use those

Joseph Okaly:

credit cards.

Joseph Okaly:

The last part of this is that most people who get a big

Joseph Okaly:

refund, tend to wind up spending it - that's kind of the

Joseph Okaly:

behavioral element. Even though they're giving you your own

Joseph Okaly:

money back, you're like, "wow, free money!", not "wow, I got my

Joseph Okaly:

own money back!". So if you go back to Episode 2.1, Bonuses

Joseph Okaly:

Aren't Free Money, it's the same kind of thing. So if I can't

Joseph Okaly:

convince you to not get a big refund, I would at least

Joseph Okaly:

strongly encourage you to plan ahead of time for the refund you

Joseph Okaly:

get and make sure at least a portion of it is saved towards

Joseph Okaly:

yourself.

Joseph Okaly:

So the base adjustment you can do to fix this, so what can you

Joseph Okaly:

do, is pretty straightforward. Your employer, assuming you have

Joseph Okaly:

W2 income, so salary wage income, can adjust the

Joseph Okaly:

withholding you take out for taxes. If you speak to your

Joseph Okaly:

accountant, they should really be able to assist here so that

Joseph Okaly:

less is taken out of your paycheck for taxes, meaning what

Joseph Okaly:

you receive is going to be greater. Again, here's an

Joseph Okaly:

opportunity to save if if your paycheck increases by $200 a

Joseph Okaly:

month now let's say, that's an additional amount of money that

Joseph Okaly:

can be saved towards your goals - do not just let it disappear!

Joseph Okaly:

There's another option as well, that's a bit more interesting

Joseph Okaly:

that might fit some people out there. If you're currently

Joseph Okaly:

making Traditional 401(k) or IRA contributions, you are receiving

Joseph Okaly:

a tax deduction in this process, which is contributing to the

Joseph Okaly:

refund that's being received. So if you change these

Joseph Okaly:

contributions now to be into a Roth 401(k), or if eligible a

Joseph Okaly:

Roth IRA instead, now you will not receive a tax deduction for

Joseph Okaly:

those contributions. So let's say I'm putting $100 a month

Joseph Okaly:

into a 401(k) now or Traditional, and then I move it

Joseph Okaly:

over to a Roth, I'm no longer going to get a tax deduction for

Joseph Okaly:

that $100 a month. However, the trade off for this is that now

Joseph Okaly:

that $100 a month, that's going into the Roth is going to grow

Joseph Okaly:

tax free. So for some people, okay, instead of getting a

Joseph Okaly:

$10,000 refund, I'm getting a $7,000 refund, you know, that's

Joseph Okaly:

fine. I'm still going to now have additional tax free growth

Joseph Okaly:

because I have more money going to that Roth 401(k), or that

Joseph Okaly:

Roth IRA. So long term, this can very likely be more advantageous

Joseph Okaly:

for your overall situation. And the trade off is just getting a

Joseph Okaly:

little bit less of a refund.

Joseph Okaly:

So a quick recap of today is that number one, while some

Joseph Okaly:

refund is okay, too much is definitely not recommended in my

Joseph Okaly:

opinion. A refund is simply the government giving you your own

Joseph Okaly:

money back that you essentially loaned them at 0% interest. Two

Joseph Okaly:

is that a refund is simply an accountant calculating if you

Joseph Okaly:

overpaid, or underpaid during the year. They are just solving

Joseph Okaly:

this equation, they're not finding some hidden money if

Joseph Okaly:

they're all following the same IRS rules. Number three, is if

Joseph Okaly:

you do make some adjustments to your situation, make sure at

Joseph Okaly:

least a portion of that extra money is saved. So whether

Joseph Okaly:

that's, "okay, I'm getting less of a refund, so I have more in

Joseph Okaly:

my paycheck, that's more I could save", or you know, "Joe, you

Joseph Okaly:

can't convince me. I like my big refund, but I'll agree to at

Joseph Okaly:

least say 50% of it". And then lastly changing or looking to

Joseph Okaly:

potentially change some pre tax contributions, so money going to

Joseph Okaly:

a Roth IRA or excuse me money going into a 401(k) or a

Joseph Okaly:

Traditional IRA and moving those contributions over to a Roth to

Joseph Okaly:

maximize that long term tax free savings growth.

Joseph Okaly:

So that's everything I have for you today. Thanks as always for

Joseph Okaly:

tuning in. If you are able to implement what we cover

Joseph Okaly:

fantastic as always, that's wonderful. That's why I'm doing

Joseph Okaly:

this, less to worry about then before and you could just focus

Joseph Okaly:

more on enjoying life. If you are wanting help with these

Joseph Okaly:

things though or have questions you need help in clarifying,

Joseph Okaly:

check out that Ask Joe section on the show's website

Joseph Okaly:

www.enjoymore30s.com, that's enjoymore30s.com. Again I hope

Joseph Okaly:

you enjoyed this episode. If you specifically enjoyed this

Joseph Okaly:

episode, make sure to follow, subscribe, review us on Apple

Joseph Okaly:

podcasts or wherever you listen. There are literally millions of

Joseph Okaly:

young families out there I'm trying to reach and help just

Joseph Okaly:

like you.

Joseph Okaly:

The next episode that we have coming up for you is 'Schedule

Joseph Okaly:

Goals...Achieve Goals!". Crazy right, you have to schedule them

Joseph Okaly:

first to achieve them? We're going to cover why goal setting

Joseph Okaly:

may sound very cliche, it did to me for a long time, but it makes

Joseph Okaly:

all the difference in the world to achieving what would make you

Joseph Okaly:

the happiest. Until next week, thanks for joining me today, and

Joseph Okaly:

I very much look forward to connecting with you again soon.

Voiceover Audio:

The conversations on this show are

Voiceover Audio:

Joe's opinions and provided for general information purposes

Voiceover Audio:

only. They do not constitute accounting legal tax or other

Voiceover Audio:

professional advice for your specific situation. You should

Voiceover Audio:

always seek appropriate advice from a financial advisor,

Voiceover Audio:

accountant, lawyer or other professional before acting upon

Voiceover Audio:

any content or information found here first. Joe is affiliated

Voiceover Audio:

with New Horizons Wealth Management LLC, a branch office

Voiceover Audio:

of TFS Securities, Inc., and TFS Advisory Services, an SEC

Voiceover Audio:

registered investment advisor, member FINRA/SIPC.

Links

Chapters

Video

More from YouTube