Nothing is certain in life but death and ta- … oh wait, you've heard this one before? Well, how about: nothing is certain in life but death and overpaying your taxes. While this saying isn't true for everyone, as some people don't pay income taxes, for more than 65% of the income-tax-paying population, it is true.
IN PICTURES: 9 Ways To Use A Tax Refund
But it doesn't matter right? You may pay too much, but the government gives the extra amount back. That's true, but if you had been able to put that money to use in any investment vehicle, you would've received more than what you get back from the government every spring. Sure, it's a big job and taxes are a necessity, there are bound to be some mix-ups - but wait until you hear just how lucrative these mix-ups can be for the government. Read on to find out how much money the government could be making off the overpayment of income tax.
Now, income tax differs from many of the other taxes that we as taxpayers pay daily because, as the name suggests, we never actually get to touch that money, it is withheld from our paychecks. So, rather than having to pay that amount to the government directly, like with sales taxes, people are apt to not care as much as they never see the money before it's taken - they just don't receive it.
When the government overtaxes on income (due to many reasons, such as tax deductions, being in the wrong tax bracket, etc), and withholds too much, it must pay this amount back to the taxed person. This is what makes getting a tax return seem like some sort of bonus or gift from the government. However, in reality, the only gift the government is giving is to itself. (Learn more about tax withholding in Tax Withholding: Good For The Government, Bad For Taxpayers.)
Income Tax and Refunds
In 2009, the U.S. government taxed more than 144 million U.S. citizens for income tax. The total personal income tax taken in by the IRS in 2009 was more than $2 trillion. That's fine and good, because the government needs these taxes to pay for building schools, infrastructure, hospitals and more, but not so fast - this isn't the amount that the government is actually supposed to bring in from personal income taxes.
What a Refund Means for You
Out of the 144 million that paid income tax, more than 97 million received income tax refunds (not including stimulus payments) - that's 67.5%. The total amount that the IRS refunded in 2009 was more than $321 billion, or around 16% of the personal income taxes collected. If you average out the tax refund per person, you get an average of about $3,300. If you just received a check for that amount, you probably wouldn't be too disappointed, even though it was yours in the first place. However, this amount means a lot more to the government.
For simplicity's sake, if the average tax-refund receiver was being paid once monthly, they were being taxed around $275 in excess income tax every month. If the refund-receiver were instead investing this amount in a savings account with an interest rate of 3%, they'd have an additional $55 at the end of the year. Sure, it's not a whole lot, but it could translate to a free dinner and a movie or a phone bill. If this money was put into investing in a fund that followed the S&P 500 in 2009, you'd be looking at an extra $440 - an additional car payment perhaps, or just something to add to your vacation fund.
On a personal level, these amounts are merely a pittance compared to what the aggregate overtaxation amounts to for the government. Just think, you're getting $55 interest on $3,300 - now multiply that by about 100 million.
Overtaxation: Government Cash Cow
If we treated the government's income-tax income like a person's, the government is receiving a monthly payment of nearly $27 billion in what amounts to an interest-free loan. If this amount of money was invested in an account paying 3% interest, like above, the government could make an additional $5.3 billion dollars in interest income.
To think of it in a more realistic way, the government gets to use this money interest-free, thus saving the aforementioned $5.3 billion. If the government put this excess money into a fund following the S&P 500 in 2009, it could've reaped an additional $43 billion. To put this into perspective, that's more than the yearly spending for the Department of Homeland Security, and almost as much as Department of Education spending, according to the 2010 budget.
Take Control Of Your Taxes
In the end it comes down to the tax-paying citizen to figure out how much they should be paying and file the correct papers to ensure that they're not being overcharged. Over a person's lifetime this could amount to a great deal if it's invested correctly. Looking at the figures above, if everyone finds a way to pay the correct amount of income tax instead of getting refunds, the government's going to miss out on one huge interest-free loan. (If tax rules and regulations are Greek to you, read Making Sense Of The Tax Code to learn how to decipher them.)
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