Why A Large Tax Refund Is Actually Bad

It’s that time of the year again. Spring Training and Taxes! Of course, you’re probably more excited about Spring Training and less about taxes.

I thought it would be helpful to shed light into why a tax refund is actually a bad thing and can potentially cost you money.

According to IRS tax statistics, approximately 75 percent of individual returns filed show an overpayment to the government.

WHAT IS A TAX REFUND?

In the simplest terms, the government is returning your money that you over paid them. This is why it is strange to hear players share with excitement that they are receiving large refunds.

Refunds are not “extra money” that you hadn’t already earned. A refund is simply a return of your own money without interest.

ASK THE EXPERTS

Some athletes even view a large tax refund as a good indication of their accountant’s expertise. Unfortunately, we would argue just the opposite.

Refunds are not the result of expert tax planning resulting in “found money” – they are instead a result of a lack of tax planning.

THOUGHTFUL AND TIMELY TAX PLANNING

As an example, a major league veteran received a Federal refund of $571k and a California refund of $108k. Unfortunately, his sports agency only performed the tax preparation but did not plan throughout the year. We view this as opportunity lost.

Conversely, the next tax year, our team actively planned for the client’s tax situation and made adjustments to minimize the withholding from our client’s paycheck. With these changes, we were able to invest $650k in a short-term investment account for the client rather than have the government sitting on nearly $700k of their money all year. Putting this money “to work”, even at today’s average money market rate of .9%, would result in an extra $5,850.

ACTION ITEM

As you report to Spring Training you will be asked to complete an updated Form W-4. Instead of simply guessing on what number of allowances to write down, you should be working with a qualified accountant to perform an analysis of your current situation and what can be done to put more money in your pocket now.

I have included a link to our last article “What Can You Write Off” in case you missed it.

Good luck this Spring and if you have any questions contact us and we will get back to you right away.