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Friday, April 10, 2015

Refund or Over-payment?

We are finalizing our 2014 federal and state tax returns today. And no, we won't get a "refund." If we did, we would have filed about February 15th! Pastors are regarded by the IRS as "self-employed." So we pay quarterly estimated taxes. We hope that our calculations will be a rough approximation of the actual tax liability. And this year, we (that is our very fine accountant, Nick Hill) did pretty well. In fact, we will apply a small bit to next year's tax bill and have a less painful check to write at the end of each quarter. 

We don't a get a refund, but we get to feel relieved.

Because of this, I can regard "refund mania" with a kind of bemused detachment. The airwaves are filled with commercials describing all the ways that businesses will help you spend your refund. You can buy furniture before you get your check from the government. You can borrow against that refund if things are tight. These commercials resemble the kinds of celebrations people might have if they win big in the lottery.

And that is precisely how most people experience these "refunds."

On my tax forms, I am told about my "over-payment." Then I am asked how I would like to manage that over-payment: apply it to next year or get it back. Perhaps that's why I don't get excited about the whole deal. I am struck by the emotional differences between getting a refund and making an over-payment. I wonder how excited people would be if we started calling refunds what they are: interest-free loans to the federal government.

People seem to treat refunds as "found money." Check out this advice to auto dealers during the "tax refund mania season." Instead of regarding those dollars as part of one's normal earnings, people treat them as lottery winnings or Christmas gifts from rich relatives. Thus these dollars are not encumbered by the need by buy groceries, pay the rent, or put tires on the family car. Since I haven't had such an opportunity in thirty-one years, I have trouble connecting to the emotions of this particular experience. 

Check out this good advice on dealing with refunds.

In fact, at least some of the dollars returned to people are worth about three percent less than when they were earned. Inflation may be low in the current economy, but it does exist. So these over-payments are to some degree negative interest loans. They are like the old Christmas club savings plans, except you pay the holder of your money a small premium for keeping your money.

I know what a genuine "refund" looks and feels like. A few years ago, a local government agency discovered that our water meter had been mildly malfunctioning for years. We have been overcharged at the rate of about five percent per year. More than a decade of that overcharging resulted in several hundred dollars in actual refund from the highly responsible folks at that particular office. If they hadn't done it, I wouldn't have known. I thought I was paying what I owed. I got some back as a surprise. That's a real refund.

So if you find yourself overcome with the irrational exuberance of refund mania, you might just remind yourself that it's really the return of an over-payment. And if you're still emotionally overwrought, you might consider giving some of your "found money" away to those in need. Here's a very fine place to share some of your returned over-payment.