Clearing Up Tax Refund Confusion

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Brian Cochran

As if tax refunds weren’t already a misunderstood area of personal finance, politicians and media outlets are adding unnecessary anger and confusion to them. Tax refunds are really quite simple. If you overpay funds to your state or the US Treasury, you are entitled to a refund upon filing your taxes. Refunds are not a special benefit or credit. They’re your own money returned to you.

The recent chatter around tax refunds is triggered by withholding changes that accompanied the 2018 tax reform. Many families experienced lower withholding and therefore overpaid less than they had in prior years, resulting in a smaller refund as they file their 2018 returns. To many, this is disappointing. But I see this change as a positive. Why pay an unnecessary, excess cost for anything in anticipation of getting your money back at a later date?

For example, imagine if you received the following message from Netflix…

Dear Valued Customer,

As a longtime subscriber to the Netflix streaming service, we would like to extend a special offer. Rather than bill you for your usual $8.99 monthly service fee, we now offer a special billing of $108.99 per month! By accepting this offer, you will accrue an excess balance in your Netflix account. Every April, we will refund your excess balance in the form of a $1,200 lump-sum payment! You may not receive your refund early, you will not accrue interest on your excess payment, and you will receive no additional Netflix subscription benefits. Please reply immediately to take advantage of this opportunity.

Would you accept this hypothetical offer from Netflix? I hope not. The same rationale applies to tax refunds. By this logic, receiving a smaller refund is a good thing. The political spin implies that your decreased refund is a reflection of something taken away from you. One article I read referred to plans to spend a “hard-earned refund check.”

A change to your refund is one symptom of the many changes in the 2018 tax reform, some which likely affect you. If you are unsure how your taxes changed and what actions you need to take, I recommend consulting a tax advisor.

Any opinions are those of Brian Cochran and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional.

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