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The first tax reporting period under the new federal tax law is surprising, confusing – and sometimes scary – for some Americans, especially those who are used to recovering government money. (the 21st of February)
AP
The biggest overhaul of the tax code in decades has been to track the average amount of tax refunds this year. (Currently, this year's refund is $ 22 higher than last year.)
The review also deepens any ever-older and emotional debate about the financial soundness of a refund.
Although financial experts say it's smarter to receive larger paychecks during the year than a refund, most Americans do not. About seven out of ten people usually get a refund, which can help keep the practice financially deficient.
"Its ubiquity precludes the logical reason for not doing it," says Kit Yarrow, a consumer psychologist and professor emeritus at Golden Gate University. "It's not a mistake if everyone does it."
(Photo: GETTY IMAGES)
But there are other profound – and not necessarily irrational – reasons why people opt for reimbursement rather than for higher wages. The minority of taxpayers are just as fervent as its taxpayers who prefer to reduce their taxes to zero.
Here are their catches.
The new "Christmas club"
Donna Batton, a retired grandmother and widow, uses her tax refund to replenish the money she used in her savings to pay for Christmas presents. His strategy echoes a service offered by banks, called Christmas clubs, long ago, says Hal Arkes, professor emeritus of psychology at Ohio State University.
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Banks would sequester a small amount each month from a customer's account into a non-interest bearing account that can only be used in November. "Otherwise, they would spend money throughout the year," says Arkes. "Because they did not have self-control."
Batton – who remembers Christmas clubs – is related to that. She realizes that she could get larger pension and social security checks and save that money each month for the holidays.
"But it seems like I'm never able to do that," said the 76-year-old, who usually receives repayments. "I live paycheck pay check. At the end of the month, it becomes difficult and things happen that you are not prepared for. "
She does not miss much either, she reasoned. His tax refund this year was $ 683. If she had deposited $ 57 a month last year on a savings account – and received 2% of a high-yield online account – she would have earned $ 8 in interest during the year. # 39; year.
It's not worth the peace of mind to know that the money will be available after the Christmas expenses.
"I just like to know that I have this repayment to reinvest in my savings," she says.
An emotional high
Tax refunds can also give the impression of unexpected winnings or lottery winnings that can be used for a big purchase, vacation or other small luxury. "People are excited about paying back their taxes," Yarrow said. "It's intoxicating."
Matt Riley, of Forsyth, Illinois, has booked this year's refund for the renovation of a bathroom in his new home. Other times, money went to a trip. "It's a fun little fund," says the 24-year-old bank account manager.
Although he does not like the idea of paying the government every month, he prefers smaller paychecks because they force him to live less each month.
"So this refund is a treat," says Riley. "Financially, it does not make much sense. But from a behavioral point of view, the month of March is a happy month when I have this money.
Lost opportunity
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The biggest complaint money-hungry people have about repayments is that they are interest-free loans to the federal government. They were not mistaken. During the year, you pay too much tax on your pay check to Uncle Sam, who will then reimburse you the extra amount after filing your taxes – with no interest.
At a minimum, each extra of each paycheck could go to a savings account and earn interest, say these finance gurus. A better strategy would be to use these extra dollars to pay off a high-interest credit card debt, even if you had planned to put the refund in the same balance.
"It will not be as good because you could have reduced balance throughout the year," says Arkes.
Once people understand that this money is better spent – the cost of opportunity in economics – they would be less inclined to ask for a refund, says Arkes.
Take Joe Berry, a professor of mathematics and social studies in Evansville, Indiana. He and his wife had the habit of getting the biggest refund possible, he said. But three years ago, after talking with friends financial planners, he now tries to reduce his taxes to zero.
The extra money will go to his Roth IRA or his son's education savings plan, the 529.
"Even if I could finance [these] with a substantial refund at the end of the year, I would miss a compound interest, "he says.
When asked if he knew the "opportunity cost," Berry replied, "I'm teaching this to my grade five students."
The season of tax returns has arrived and the overhaul of tax legislation involves potentially significant changes to your budget. Have you been reimbursed or do you owe it to the IRS?
Josmar Taveras, United States Today
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