Friday, February 8, 2013

Why Our Tax Refund is So Large

Many people hear how large our refund is and assume we pay too much in taxes throughout the year. This is not the case however as we actually claim exempt from taxes in order to get the most use out of a minimum wage paycheck as we can.

Now this does not mean we do not pay taxes, it is just we do not pay federal but we do pay state and social security taxes.

The working poor has the bonus of being able to claim earned income credit if you have any qualifying children under the age of 18. We happen to have 2 qualifying children and this is where most of our refund comes from. It is a government stipend basically to help boost your income, without this we would only be looking at around $1700 rather than the $6900 we will be getting back this year.

Now what the working poor does with this refund varies and I have seen first hand where some use it up all at once on a fairly lavish vacation. Others use  it  to  catch up bills they have fallen behind on or replace broken items from months behind on their mortgage or replace cars that have broken beyond repairs.

Yet another place many typical families spend it on are spending sprees for luxury items. Perhaps this explains the large flat screen TVs, video game systems, entertainment centers, air conditioners and others that seems to be a pet peeve on many threads and comments related to the poor. I have seen on many blogs and boards about those in poverty where the commenter's talk in  disgust what they have seen in the households of the poor. If these items that people complain about the poor having was  not gifted to them ( in many cases nice items were indeed gifted or had before financial hardships struck) then perhaps a large refund was used to purchase these luxuries.

For many it  is like winning a mini lotto, a windfall that goes as quickly as it came without too much thought put into it. Or in the case  of playing catch up is what keeps the house out of foreclosure.

It is quite easy to spend a windfall when one is used to struggling all year and in many cases money certainly is being managed poorly to begin with.

The smart ones think it out very carefully and use this for what it is intended for, to improve your quality of life. This may mean using it towards projects that will lead to a more self reliant lifestyle, making necessary household repairs to live in a comfortable, safe, healthy environment. Some may use it for home business ventures that  will lift them up and out of the working poor status. Get a stock pile of food going, put gardens in.

Some may even divide it up into 12 months of monthly income to boost their income for the whole year to relieve some of their struggling for the whole year rather than a month or two.

At any rate, the government can do things to help boost the refund of the working poor, unfortuantly they can not force folks to be smart with it and many will use it quite foolishly sad to say. I suppose this may be true with any income bracket that is getting any refund at all.

For us? We are thinking it through quite carefully and will make careful decions on where our money can go that will actually help us out this year!

Happy Tax season ya'all!



 

8 comments:

  1. Thanks for this insight. As you note, it's understandable how tempting it is to use a windfall like a tax refund for splurges when you're living paycheck to paycheck most of the year and barely keeping afloat.

    I'm lucky to not have this issue, but I do get a good tax refund every year mainly because of my mortgage interest deduction. I tend to use the tax deduction for home projects, and I think it's sensible to do since it is maintaining my main asset. Projects like spot tuckpointing, landscaping/mulching, new flooring, sewer rodding, etc. usually eats up the entire tax refund each year.

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    1. Hi Linda, home projects is a very sensible area to put your refund to use! Thanks for commenting

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  2. Thanks for the explanation. I didn't know about this policy. You can't fault people for wanting to give their kids tvs and video games when they can't give them bigger houses or better furniture or more insurance. Everyone needs a cold soda and some ice cream or a treat once a week. Kids don't usually care if they don't have ten or more outfits, but they would like to see the latest blockbuster movie so they can talk about it with their friends.

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    1. Agreed, and this most likely is a large underlying reason why many would purchase these things with a refund. Parents want to be able to give their children "something" usually.

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  3. Great post. It explains this situation very well. We also get the earned income credit and it does get used on some "splurge" items as well as getting us caught up. We also use some of it to purchase household supplies in bulk and animal feed.

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  4. The credit for children only goes till they are 17 not 18, as we found out this year.

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  5. Is the $6900 more or less than the total amount of taxes you did pay? (meaning social security plus state, etc)

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  6. “...government can do things to help boost the refund of the working poor, unfortuantly they can not force folks to be smart with it...” – True, true. Managing our taxes shouldn't be a mere part of our routine. This needs careful preparations. Why, some even hire their own tax preparer to maximize their refunds.

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