E24: This Will Make You Rethink Tax Refunds

Nate: In this episode, we’ll discuss the reasons why you shouldn’t be so excited about your tax refund, and maybe what you should do instead. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right, so this one’s kind of a fun one, and we did this kind of at the wrong time of the year I’d say. We’ve missed tax season.

Holly: Absolutely.

Nate: But you know, we hear all the time, even in our realm of business, “Maybe I’ll get started when I get my tax refund.” Or, “I’m really looking forward to getting my tax refund, then I’ll finally have money.” You and I have a different viewpoint on it, and we want to make sure everyone else understands, not only about the tax refund, we also have some other things to say that you may want to implement.

Anyway, about the tax refund Holly, why should you not be so excited to get a tax refund?

Holly: Well really, when you think about a tax refund, it’s your money you already gave the government to use for a period of time, or they had it. Whether it be an estimated tax, or by the time the tax is filed, you get this refund. But really, in reality, it was your money that you gave to the government to use, and then they just sent that money back to you. And they didn’t send it back to you with interest payments. It’s not the same dollars you sent them. It’s different dollars, and yet we get excited because, “Yay, we get a refund.”

It is a refund, but it was your money to begin with. You gave it to them for a period of time that you couldn’t use. So while the government had it, the IRS, you couldn’t use that money. And I’m gonna use me personally. We spent over $100,000 in taxes last year. Significantly over that in estimated taxes, and we got a refund of $200. I was not even excited about the $200 because I realized that had I used the $100,000 I gave them in advance and put it through investing and a life insurance policy, I would have actually had more than what the refund was.

Nate: Oh sure. I mean that’s the thing. I’ve heard people say that they don’t even pay estimated taxes. That’s something you may even be doing yourself, just because they say the interest that the IRS charges me for those taxes, that I’m not paying during the year is actually less than I can make with that money, if I was just to use it.

Of course, they don’t get a tax refund. They have to pay a big check but because they actually were disciplined in using the money, they didn’t just spend it. They used it. They actually had more money than they needed to send to the government because they used it wisely.

Holly: We’ve been talking that you always want to keep your money in motion. Okay? When you are paying those estimated taxes, when you’re giving that money to the IRS in advance, that’s not your money in motion. You’re taking your money, and you’re parking it. You’re giving it to the IRS to use, but they don’t give you any of that.

Actually, for me, with estimated taxes, I will pay less by paying penalty and the interest like you said, versus actually having given them the money to start with. So for me the reality is, I can make more off that money than giving it to them. And it’s not theirs to begin with, in my opinion. I earned the money. I mean I will say the IRS is the biggest robber of our wealth out there today. Why am I gonna give them money, good dollars today for them to give me weaker dollars in the future?

Nate: Yeah, exactly. That’s what we’re trying to teach people to do is to keep money in motion. Don’t just send it. Some people don’t have the option to not send it because they get withholding. You and I as business owners, we actually have to send checks because we don’t have any withholding, but then the average person withholds …

Some people think of it as a forced savings plan. I know that they do. They say, “I’m so undisciplined. I will not save money, so I’m just gonna have them withhold the money at a higher level than I know I should be, just so I can make sure to get a tax refund come next year.” And I say, guys, maybe at least you’re trying to save in this awkward, funky way. But why would you want to save that way, when you could do so much better if you just got your hands on your money, and started using it.

Maybe it is time to learn a little bit of self-discipline. And maybe, just beyond a systematic way, as soon as I get my check, I move my own money out of my personal account into a different account, and I’m gonna use that to build wealth at a much better pace, I can tell you, than the IRS because they pay you no interest or anything when they send you a tax refund.

You’re pretty much giving them money, and they don’t pay you interest. But they’ll probably use it to make money somehow as best they can. Probably not actually, it’s the government we’re talking about. But hey, they could if they wanted to.

Holly: It’s not gonna cut out that national debt. Actually, what I did Nate, even last year. My husband and I, what we did is we started a policy that is just for taxes. So what we chose to do, starting in 2017, instead of giving that estimated tax over to the IRS, we’ve put it into a life insurance policy because we know that just the growth on that alone will pay any penalty just inside the policy. The growth will pay any penalty that we would have to pay. Plus, we then have the money to pay our taxes come April.

Nate: Exactly.

Holly: It is a discipline. You have to be disciplined. We just don’t touch that money, unless it’s for taxes.

Nate: Right. That’s the key.

Holly: But we know that within four years of time, that will far exceed what we have to pay in taxes, and so it will be there for the lifetime of us having to pay taxes. Eventually the growth will be greater than what we owe in taxes.

Nate: Right. Your gross becomes your net at that point, when your policies are growing by more than your tax bill.

Holly: Exactly.

Nate: We’ll go and do just a quick message from our sponsor, and then we’ll be back to talk about a few other ideas, that we’ve learned about how to make this thing work.

Holly: Are you tired of being stressed about money? The Dollars and Nonsense Podcast is sponsored by Living Wealth. Visit livingwealth.com/freedom to get your free smart money eBook and sign up for a personal wealth presentation today. Living Wealth is a family-owned and operated business, which works with individuals, families, and even businesses to slay the money-stress dragon. Our clients receive individual coaching regarding wealth creation, and how to create a retirement income. You’ll be enabled to have cash today and in the future.

Since 1972, Living Wealth has been committed to educating smart people on basic money principles to assist them in becoming debt-free and finally find financial freedom. Let us help set you free. Remember to visit livingwealth.com/freedom to receive your free eBook and even sign up for an individual wealth presentation today.

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Nate: All right, so welcome back. We’re talking about tax refunds and some ideas maybe around it to change your thinking. It’s not just free money the government is sending you. It’s your money, that they’re paying you back with no interest because you sent too much to them during the year, not the best savings plan.

We think you can do a lot better, and we even have a story, I guess you could say story, that we’ve heard of a guy named Warren Buffet. I assume you’ve heard of him. Rumor has it that he postpones paying his taxes for years. I don’t know how long it is. I haven’t done a lot of the research, so this is down the grapevine maybe. I’ve heard even up to seven years. Seven years later, he’ll finally be paying the taxes he owed seven years ago or maybe even more than that. Now why would he do something like that?

Holly: Well the reason why he really does that is because he can make more with the money he has using it and investing it and getting a greater return, than he would in paying the penalty and the taxes to the IRS. So he pays the interest due on those taxes to the IRS. He pays the penalty. He just keeps deferring the payment as long as he can, so that he has the maximum opportunity of time to use that money to use it as an investment.

So for him, it’s actually a way of, he’s not gonna give over control of that money because he knows he can do better with it than what the IRS could do with it. So he’s gonna wait as long as possible to pay any of that. He’ll pay the penalty, and he’ll pay the interest because what he’s generating in income off investment is way greater than what he would have to give them.

Plus, what most people don’t realize, is even if he can defer it five years, he is giving them weaker dollars in the future, than the stronger dollars he had five years before. That’s significant. If you can give them $100 and basically five years later, it’s $112 that is what makes up the $100, then you’re better off. So he actually is moving his moving. He’s constantly keeping it in motion, and he’s not letting the IRS dictate or govern how he spends that money, and when he gives it to them. He’s actually in control of when he’s gonna pay it.

Nate: I’m not necessarily telling people on the call you shouldn’t pay your tax bill for five years. I’m not that savvy. I guess I would say. Just to get your mind thinking, that hey maybe me having this weird idea of forced savings with the tax refund is not really the best way that you could be going about it. It’s definitely not the way that the wealthy thinker, the business owner thinks. Hey maybe I’ll send the IRS more money than what I know I owe them, just so they can send me some of that back with no interest.

Holly: And the reality is Nate, I’ll give a realistic example of a client of mine. He had money, basically from a retirement program. And he actually was gonna use that money to pay for his life insurance policies. He was so concerned with the IRS tax bill, that one was due in April, and he didn’t want to pay to have an extension done. So he went ahead, and he paid his taxes, then he had a premium come due in May. He said, “Now I have no more money to pay my premium.”

If he had just done the extension, he actually could have put the same money he gave to the IRS into his life insurance policy, that’s a seasoned policy, so it’s growing more than what he puts in. So he could have put that same money in his policy, paid the IRS, their taxes, and still had about $5,000 extra, above and beyond what he’d given them just to use again. And he wouldn’t be out of money.

Now he’s out of a life insurance policy, and he has paid his taxes, but he has no money period. The money’s gone. He paid the penalty. He didn’t want to do anything, all because of an extension of, “I don’t want to have to pay for an extension, or pay that IRS tax six months later.” I’m all for extensions, if you don’t have the money, go ahead and do the extension because it gives you six months to do something with that money anyways.

But I’m not saying don’t pay your taxes either. I pay my taxes. I’m not as savvy as Warren Buffet, probably because I don’t want a visit from the IRS.

Nate: Yeah, I’m still a bit of afraid of them, I guess.

Holly: I’m a little intimidated by the IRS still, so I will listen. But also, accountants are really big on saving us money. Oh you gotta pay it. You gotta file that tax in time. I know even my accountant can be like, “Holly, here’s your estimated tax.” Now I don’t pay the estimated tax my accountant says because I’m just not giving over control of that money. I will pay a little, but I’m not paying nearly the estimated tax. I’ll give them a little bit of what they need. I’m just not gonna give them all of it because I do think that we have to control our destiny, and we have to control our life. It starts by us managing our money, and also being in control of that money.

Like Nate said, when you say the great savings plan is to have them deduct more from your paycheck, so then it’s savings. It was your money you earned anyways. Really, learning that actually you have to do needs and wants.

Nate: That’s the biggest problem, is that we’re not paying ourselves first. That’s the biggest issue why people have the withholding done is because they know they’ll spend it if they see it. The same thing goes why people would maybe worry to not pay the estimated tax, like you’re saying, is because what if we spend it, and come April 15th, we don’t have it?

You can make money, if you have some discipline, and you use wisdom. If you know yourself, and you’re not very disciplined, maybe it’s time to change. Maybe with that discipline you can say, “Okay, well maybe I don’t have to pay the estimated taxes, but I know I need to make sure I have some money to do it. What can I do now, this time instead of pay the estimated taxes, so that I have the money? And then maybe above and beyond what I need to pay.”

That’s what we’re trying to talk about by telling you the stories about Warren Buffet. We can practically do that with a policy. That’s really what you and I are doing, and not saying that everybody has to do it that way. But it could be a wise decision to start thinking of how you might use one of your banking policies to pay your taxes. You can use it to pay estimated taxes, if you’re still a little bit worried about that, but you could use the same dollars you were gonna pay in estimated taxes, put that in your policy, pull from the policy to pay the tax, and actually come out ahead, possibly.

Holly: Absolutely.

Nate: I mean, I’m not gonna say every time, but we’ve seen it happen many time.

Holly: The policy’s never hurt me. What’s hurt me is when I gave control of that dollars over to somebody else, to be excited about them returning it to me in the future. You shouldn’t be, but even if you are like, “Well it’s a great savings plan.” You can take that same withholding from your paycheck, and it’s you being disciplined like Nate said.

And you can send it monthly into a policy. The withholding goes into a policy, so you have it when your taxes are due. It’s just a matter of you have to do one additional step, but if they take it out of your withholding, and you know how much because you can see on your pay stub what they’re taking out. You can just say, that’s what I want to do with a policy, and it comes out monthly from your bank account.

So you never even touch the money. It’s automatically taken out, and I think if you’re afraid you’re gonna spend it, instead of sending it over to the government, put it into a policy because at least there will be a death benefit too that provides for your family should something happen. But the greatest thing is you have a policy and the money to use to pay the taxes. So it’s just a different way of thinking, but we should never be excited that the government, the IRS, gave us back our money that was ours to begin with.

Nate: Right.

Holly: Without any interest.

Nate: Some people get so excited when they get their tax refund. I’m saying, “Man, let’s be wise stewards with it. Maybe let’s figure out a new way to use the money that you’re sending to the government on no interest.”

I think that’d be a wise idea, but if you want to talk more about it, you can reach out to Holly or me personally. We’ll kind of tell you how we do it. This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/E24.