Tag Archives: tax refund

Tax Preparation

States Will Garnish Your Federal Tax Refunds

One of my clients was ecstatic when he was informed that he’d be getting a nice tax refund. I was betting that he had already spent some of the money. Later on I ran into him at a networking function and found out that almost all of the refund had been absorbed by the state.

What happened is the client owed a sizable amount of tax from the previous year. He’d done the right thing and set up a payment arrangement with both the state and federal government, since he owed something to both of them. He’d been making regular monthly payments to both to offset the balance.

The bulk of the refund was coming from the federal government. The client knew that was going to happen but assumed that the rest would be coming his way.

Thus, he was surprised when he found out that one source of the state refund, which was coming from another state for work his wife had performed, had been garnisheed by New York state. Not only that but at the end of the same week, he received another letter saying that the state had put out a claim on the rest of his refund, to the extent that all he was going to receive back was around $40.

That’s a major blow when one is expecting more money, yet it’s a cautionary tale when it comes to paying on back taxes owed. Whereas the federal government doesn’t put out a garnish on state taxes, every state in the union files with the IRS to recover any outstanding funds owed to them before they make it to your bank.

What you need to know is that it doesn’t only go to taxes if requested. If there’s any other outstanding federal debt, your refund can be intercepted by them. States can also garnish refunds if there’s child support payments that are outstanding, and if you’ve been ordered to pay back any workers compensation you might have received from your state, and in some cases even student loan payments if you haven’t been paying them on a regular basis.

There is a caveat to intercepting refunds though. If you filed a joint return but filed separately, the spouse who doesn’t have an obligation can request their part of the refund without the states being allowed to take any of it.

As always, the government will make sure they get their money from you. If you’re independently employed, you can only help your case by making quarterly payments when you can. It also helps if you can make bigger payments instead of the bare minimum when setting up payment arrangements.

In any case, it’s good to know what could happen so you don’t get caught off guard when you don’t receive the refund you were expecting.
 

Budgeting

Do You Want A Tax Refund?

Every year there are a lot of people who end up being very happy because they’re getting refunds from both state and federal tax returns. This allows people to plan different ways of spending all that newly found money; who wouldn’t want to do that?

Actually, there are a lot of people who purposely try to minimize their tax refund, to the point that if they can break even they feel like they’ve maximized their money all year. What are they possibly thinking?

If you get a big refund, it means you paid more tax than you needed to. In essence, you’ve allowed the government to use your money to grow their own instead of you being able to enjoy it or even invest it yourself so that you could benefit from the fruits of your labor.

Being able to spend extra money during the year might sound like a lot of fun. Investing that extra money makes a lot more sense.

Think about it like this. Say your refund is $500. If you invested that instead of allowing the government to use it or you spending it on your own, and you were able to get it into an investing that paid 5% on the year, you’d earn around $25 or so. That doesn’t sound like a lot of money, but stick with us.

Not only would you have started growing your own money but you don’t pay taxes on the money you’ve invested as long as you allow it to stay where it is. That wouldn’t be a major discount on what you’d pay in taxes, but it would bring what you owe down a little bit. And, if you continued adding that same $500 a year, your growth would be around $6,700 in 10 years, all nontaxable.

Of course the idea is that you’re actually investing more money than just that $500, but it all helps an it’s all tax free growth.

It’s something to think about, although if you’re using your refund for that Caribbean cruise you’ve dreamed about all summer it’s probably a tougher choice to make than it should be.