re(Funding) Our Future

According to recent IRS data, nearly eight out of ten U.S. tax filers get a federal tax refund. The average amount refunded being around $2,800. Oh, by the way: those refund checks were a little late this year because of “sequester-related" difficulties at the IRS.

Now I know that most of us understand the need to send off a few bucks to our friends in Washington so they might spend it wisely on things for our collective benefit, like infrastructure. But overpaying—which amounts to an interest-free loan to the government which then has to be paid back—has never made sense to me.

Katherine Pickering, executive director of H&R Block’s Tax Institute has this to say: “Many people want to make sure they don’t owe the IRS money, so they err on the side of having too much withheld from their paycheck.”

Interestingly, most tax refund recipients use the money to buy a “big ticket” item like a down payment on a new car or to pay for a vacation. But whatever we do with it, it seems that the complexity of our current tax code makes it difficult to know exactly what we might owe during a working year. Simplifying the tax code is an obvious answer to me for a number of associated reasons, but I can’t see that happening in the short term.

So I guess around 80% of us are comfortable with this annual ritual. But here’s a reason why we may want to take a closer look.

As of May 2015, the average U.S. household credit card debt was $15,609; the average U.S. household mortgage debt was $156,706; and the average student loan debt was $32,956.

All in all, total combined debt was $12 trillion. (Up nearly 2.6% over last year.)

Typically, and under current tax code, mortgage and student loan interest payments are tax deductible—credit card interest is usually not. Without even changing our spending habits too much, if we redirected that monthly overpayment from the government to our average credit cards, the nation’s credit card debt would be wiped out in about five and a half years!

Redirect it into a 30-year $150,000 mortgage and it reduces the payment period by 11 years, as well as the amount of interest payable by about $37,000!

See where I’m going?

I know it’s an oversimplified solution and I know not everyone will take this seriously, but give it another look when your refund check turns up… late.