Tuesday, May 7, 2019

My Tax Refund is Lower! What??

My Tax Refund..Man!

Tax Season: The time of the year we are all hit with the fantastic commercials regarding getting the best refund, or the most refund, or whatever jingle to capture your attention. However, as I scan social media, and listing to various conversations with people, I see many people who are concerned about receiving a lower refund. Yes, a huge concern..or is it?

A relevant Read: Americans Work Almost 4 Months Just to Pay Taxes

The IRS Thanks You

We all know the IRS sends out “Thank You” cards to all of its clients, when they receive taxes during the year. Wait, they do not. The issue: If you are receiving a refund, this is simply a return of the tax withholding taken out throughout the tax year. In short, you are giving the IRS a loan.Great work.

Wait, hold up..a loan?

Yes, a loan. Even better: An Interest FREE loan. The tax paper work, that designates the withholding amount, tells your employer how much to take out in taxes each paycheck. When you file your taxes, you may receive a refund..maybe.

The Opportunity Cost: It’s Lost

Based upon that scenario, it is an interest free loan given to the IRS. As previously mentioned, you may receive all the money back. Contrast that if you owe the IRS: Penalties and interest are charged if you owe them. Are you able to borrow money from the bank without having any interest charged to you? No. Consider what could have done with the money withheld..oh and the lost interest. Most people are lining up to receive their tax refund sooner, as they are borrowing that money from a financial intermediary to receive their money..which was loaned out to the IRS.

Cash Flow Analysis: Employee vs Business

With regards to how taxes are levied, there is a fundamentally stark difference between an employee versus someone who owns, or controls, a business. With an Employee, when he is paid, his gross earnings are realized…only for an instant. After that moment, taxes are taken out of the employee’s paycheck. Note: The employee can have benefits come out before taxes are assessed, which potentially lowers the gross income amount—this amount is used to calculate the taxes withheld.  After all of those taxes are withheld, the employee can spend what is left over. In short, Uncle Sam obtains his taxes first.

Contrast that to the business owner, assuming he controls/owns a business entity, he earns revenue for his business, pays out expenses, and sees a profit or a loss. A profit is the case if the business owner earns, in revenue, more than he pays out in expenses. The amount that is left over, profit, is used to determine how much in taxes are assessed. If the business shows a loss, the business owner’s tax liability is mitigated, in many cases. Example: Amazon. How does Amazon Pay $0 in Federal Income Taxes?

Conclusion

Taxes, withheld during the year by the taxing authority, is a loan once “refunded” at the end of the tax year. There is a difference, with regards to taxes, between being an employee versus a business owner. The ability to mitigate and take advantage of the tax code favors heavily toward the business owner. Of course, this is a very simplistic example, simply to demonstrate conceptually the differences, as these things can vary based upon the specific situation. That is why working with a tax professional is advised strongly when working with your taxes.

Relevant Article: Americans Work Almost 4 Months to Pay Taxes

No comments: