IRS Tax Support

It’s hard to beat the thrill of a windfall. So far this year, more than 50 million of us have felt the rush, courtesy of the IRS. As of late March, Uncle Sam had mailed nearly $128 billion to taxpayers, which amounts to an average refund of $2,548 (not including rebate checks, which won’t begin to be mailed until early May).Not that I don’t enjoy getting money in the mail, but I do take a dim view of this annual financial rite of passage.

The Worst Investment You’ll Ever Make

You already know this, but I think it bears repeating: Your tax refund is tantamount to an interest-free loan to Uncle Sam. In other words, if you’re getting the average refund, that means $212.33 of your money is pulled out of your paycheck each month, plunked into an account where it earns squat (a.k.a. “zero” or “zippo”) in interest, and then mailed back to you like some prize for spending hours toiling over a blizzard of tax forms.

What you might not have considered is what it cost you over the course of time to let your money languish interest-free in the government’s coffers.

If the IRS were paying out measly checking account rates (0.5%), you’d at least earn enough to buy a few espressos — so long as the bill was less than $6. If your money earned the same rate of interest as a decent money market account (say, 4%), you’d be up to about $50 extra over the course of one year.

Nonplussed? I hear ya. It hardly seems worth the trouble to adjust your withholding to earn just a few extra bucks. But what if we were talking about more substantial coin?

What Uncle Sam Really Owes You

Let’s say you invest each monthly $212.33 overpayment in an index mutual fund that simply tracks the overall stock market’s performance. Over the course of 12 months, your $2,548 “refund” would have grown to $2,631 (based on the stock market’s 7% annualized rate of return over the long term). OK, that $83 profit is better than parking it in a plain old bank account, but just barely.

Keep it up, though — adjust your withholding so you zero out with Uncle Sam every year and invest what you were previously overpaying — and over the course of five years, using the same scenario above, we’re talking about a tidy profit of $2,439. And after one decade, if stocks continue to do what they do (go up, go down, but smooth out and gradually gain value over the long haul), we’re talking a whopping $11,215 — quadruple the amount of this year’s average tax refund.

That’s the kind of money that makes the government’s rebate check start to look like chump change.

Get Your Tax Refund Right Now

At The Motley Fool, we’re committed to turning non-investors into shareholders, and we think results like these are convincing enough to make us ask HR for a fresh W-4.

Grab your most recent pay stub and last year’s income tax return and use (shortcut alert!) the calculator at paycheckcity.com, (mind-numbing alert!) the actual IRS Form W-4, or (compromise alert!) the IRS’s withholding calculator to guide your adjustments.

To avoid underpayment penalties, shoot for the number of allowances that satisfies 100% to 110% of the prior year’s tax payment (not counting your refund). Don’t worry about nailing your withholding perfectly. Put a reminder to revisit your income status in your datebook for June, when you’ll have a better handle on how your annual wages and withholdings will shake out.

A lot of taxpayers would rather over-withhold from their paychecks than owe the IRS come April. But now you know better. Tell Uncle Sam you no longer need his banking services. 

Motley Fool