Blog | Personal Finance

Why You Want a Small Tax Refund

What the rich already know about paying less in taxes

As April 15th sits only two months away, taxpayers are lined up outside of their neighborhood tax preparation office eagerly waiting to hear just how big their tax refund will be this year.

To the shock and surprise of many tax-filers this year, refunds are going to be smaller—if they get one at all. “The average refund in the second week of the filing season ended Feb. 8 was $1,949, down 8.7 percent from $2,135 a year earlier, according to IRS data released Thursday,” the AP reported.

“But how could this be?” Did Donald Trump dupe Americans into believing they would have huge tax refunds when he passed the 2017 “Tax Cuts and Jobs Act?”

No. He didn’t dupe Americans. Turns out, Robert Kiyosaki is right, and Americans are lacking the financial IQ to understand just what happened last year.

Here’s The Reason Tax Refunds Are Down This Year

If you work and pay taxes in America, then you are well aware that employers are required to withhold a certain percentage of your income. When you were hired at your job you might remember filling out a W-4. This is the document where you declare the number of federal tax withholdings from your paycheck.

Knowing what was going to happen with 2018 tax returns, the General Accountability Office issued a 26-page report regarding individual and employer responsibilities with regard to tax withholding.

“The problem, as described by the GAO, is that the TCJA made a number of changes to the tax code that, when combined with data limitations for the U.S. Treasury when crafting tax-withholding guidelines for 2018, led to more under-withholding and less over-withholding.” said Sean Williams of The Motley Fool.

To put it simply, it means that fewer dollars were being taken out of the employee’s paycheck throughout the year. Essentially, for probably the first time in the employee’s life they were keeping more of their own money during the year—and not giving the government an interest-free loan.

Why A Small Refund is a Good Thing

There's long been an incorrect belief among taxpayers that receiving a refund is a good thing. The problem with this belief is that you (the taxpayer) don’t have access to your own money throughout the year, making it harder to put your money to work for you.

If you had more of your own money to spend throughout the year, what would you do with it? Pay off a larger portion of credit card or student loan debt? Would you put it aside to invest in a cash-flowing asset? The point is, instead of waiting until your refund arrives you could use the added income in each of your paychecks now to reduce your principal before interest has an opportunity to build on what you already owe.

Plan for Next Year

Since you’ll be keeping more of your own money this year, put that money to work for you! Here are three simple things to do now to lower your tax liability next year:

Start a investment fund: A tax return is the perfect time to seed-fund your investment account. Spend some time deciding what you want to invest in: paper assets, real estate, commodities, or business, and use your tax return as the initial funding for that investment activity.

Start a side business: By setting up a side entity, you can realize significant tax benefits by writing off your expenses for the business. This means that if, for instance, you want to get into real estate investing, you can write off all expenses related to that activity-including travel, education, and more.

Hire a CPA: A good CPA will be able to sit down and help you plan out the best way to maximize your investment fund and take advantage of your legal business entity.

Here’s the secret about taxes that the rich have figured out—a small refund is a good thing. A tax refund is the money giving you “free” money, they’re just giving you back what was yours in the first place.

So the next time you hear someone complaining that they got a smaller refund, give them a high-five and tell them congratulations, you kept more of your own money!

Read more about how to build massive wealth by lowering your taxes in my book, Tax-Free Wealth.