You probably know someone who files their income tax return on February 1, then gleefully waves a fat refund check in your face a few weeks later as you’re just getting around to facing the fact that you need to start working on your taxes. They act so smug, as if they are one step ahead of everyone else. Well, the next time you see them wave their refund check, you can smirk instead. Why?
Because most of the time, a tax refund is a sign of financial ignorance.

In a recent article about National Payroll Week (now there’s a Hallmark holiday if there ever was one), James Jenkins, a Michigan certified public accountant, explains that refunds “are really a waste of money.” In his opinion, if you normally receive a federal tax refund of over $100, you aren’t planning well enough, because the extra money you leave with the government for the year is basically an interest-free loan.
“It could be earning interest or dividends for you— or at the very least paring down debt. You’re paying 18 percent on a credit card bill and meanwhile the IRS is paying you zero. I just can’t stand the thought of that,” says Jenkins. Here, here! Mr. Jenkins.

Getting a refund usually means you are sending too much money, too soon, to the government.
Unless you are doing this because you think of your interest-free loan as a charitable contribution to the public welfare, it doesn’t make sense. So why do so many people still over-withhold? Here are a couple of possibilities:

1. Complexity. Different taxes that appear on a payroll stub are taxed on different rates. Social Security and Medicare are based on gross income with yearly maximums, while withholding for federal income tax is based on income after healthcare and retirement plan contributions have been subtracted. Additionally, the standard withholding tables only calculate the expected tax for one income, which may be completely different if both spouses are working.

2. Psychology. Taxes aren’t just a financial drain; they are psychologically taxing as well. After wrestling with hard-to-understand regulations, minute calculations, confusing forms and the fear of audit, it’s even worse to have to owe money at the end of the process. Having money come back almost seems like a reward for going through the process, while having to pay is just piling on the misery. Emotionally, many taxpayers would rather receive a refund, even though it represents an overpayment of taxes.
Are there ways to deal with the complexity and psychological avoidance that surrounds withholding? Of course. The key is finding an approach that not only helps you keep the most money, but also doesn’t push your stress envelope. Here are a few hints:

$ Know the rules. Get a copy of Circular E, an IRS publication that includes withholding allowance tables based on income and marital status. With a minimal amount of research you should be able to determine where you fit based on your adjusted gross income.

$ Use last year’s taxes as a guide. If income this year is nearly the same as last, try to see if your present withholding will result in overpayment. Two important reminders: if you have a working spouse, combine incomes and withholdings. If you make an adjustment, be sure the new exemption level still adds up to the tax you actually paid last year. Owing more than 10 percent of your total bill next April 15 will make you liable for penalties and interest.

$ Get help. Work with your payroll manager or tax advisor. These people are “professionals”— most have charts or computer programs to help bring the numbers into focus. If your payroll contact needs help, direct them to The American Payroll Association Web site (www.americanpayroll.org).

$ Save the difference. If you save the increase in your take-home pay, it should eliminate some of the psychological trauma of paying a bit more when you file your return. If you miscalculate your tax bill and end up owing some money, the only real difference will be that the money earned some interest for you over the year, instead of sitting in the Treasury. Otherwise, whatever is left after filing is yours to spend, clear debt or invest— just like your refund check.

Everyone’s situation is different, but it’s worth a few minutes of everyone’s time to see if there’s more money to keep. Giving an interest-free loan to anyone other than your children isn’t a good financial strategy, and it’s even worse when the recipient is a sometimes inefficient and irresponsible government that consistently spends more than it receives in revenues.

Josh Fox is a financial advisor of the 70-year-old, award-winning financial services firm, Strategies for Wealth Creation & Protection, located in Manhattan and White Plains. For additional information, or if you have any questions, please contact Josh Fox at (212)701-7929 or e-mail jfox@strat4wealth.com.