Getting a check in the mail is exciting, there’s no question about it. Whether it’s money you’ve been expecting or a complete surprise, there’s an emotional high that comes with getting paid simply by walking to the mailbox. Undoubtedly you are richer than you were the day before, and perhaps you already have a plan for this money – a new pair of shoes, a vacation, or perhaps an ounce or two of recreational cannabis.

As a child, whenever I heard the concept of tax refunds mentioned, it was always in the context of seeing a character on TV getting a check in the mail and celebrating this unexpected windfall. But as soon as I learned what that tax refund actually represents, I began to realize that tax refunds deserve a more nuanced and deeper analysis.

Before we look at what the pretty check with the Statue of Liberty on it represents, though, let’s take a step back and understand the important relationship between tax liability and tax payments.

Tax Liability: for most folks, the word “tax” causes eyes to glaze over. Combine that with the word “liability” and nothing short of propping your eyelids open with toothpicks can help you pay attention. Bear with me, this is the most jargon-y term I will use in this post.

The term “tax liability” is simply a reference to the proper amount of tax you owe on your income. While grossly simplified, think of this as your income multiplied by a tax rate. The more income you make, you more tax you owe. Pretty simple, right? Of course you are allowed to deduct certain expenses from your income before multiplying by the tax rate – things like mortgage interest, charitable deductions, IRA contributions, and so forth.

So let’s say you made $100,000 last year and the tax rate is 25%. You owe the government $25,000.

The mechanism you use to inform the government how much you made and the resulting tax you owe is by reporting this on a tax return. An individual tax return is also referred to as Form 1040.

Now most of us do not have any memories of taking out our checkbook and writing the government a check for $25,000. Why is that exactly? Because throughout the year, you have been sending the government smaller payments in anticipation of owing the tax to them.

Tax Payments: it would be sweet if we could all kick the can long enough to only pay the government once a year, on April 15. Unfortunately, that’s not how this whole thing works. The government requires you to send them periodic payments in advance. The “how much” and “how often” of these payments are questions a professional accountant can help you strategize and determine.

For most of us that earn a salary or a wage, the periodic payments are taken out of our paychecks and send to the government by our employers, on our behalves. That is to say, your employer withholds money from your check in order to send that money to the government. The more your employer takes out of your check, the smaller your net paycheck is.

For those of us that are self-employed, retired or otherwise do not receive a paycheck, the government requires estimated tax payments be submitted in a similar fashion. So these folks would take out their checkbooks and cut a check to the government. Usually this occurs quarterly, but again there are strategies here to minimize how much and how often we pay the government.

Whether through paycheck withholding or estimated tax payments, the implicit deal (from the perspective of the government) is this:

Pay us now and later on we will settle up.

This is true because none of us know with absolute certainty how much money we will make in a year, and, accordingly, none of us know with absolute certainty how much tax will be owed to the government. These amounts will only be certain once the year is over and once Form 1040 is filled out.

Once Form 1040 is filled out, ideally by a smart, charming and handsome CPA, your tax liability is determined. Then, and only then, can we compare this amount to how much you paid the government – again, via either paycheck withholding or estimated tax payments – to determine whether you paid too much, too little or just the right amount.

This brings us full circle: when you paid the government too much, they send you the excess back. Behold, the prodigal tax refund!

However, if the implication is not clear already, it is this: the government is sending you your money back. Sorrynotsorry to burst your bubble, but that check isn’t a windfall, it isn’t a bonus, it isn’t something for nothing. It’s your money that the government was holding for you.

And to twist the knife just a bit more: the government isn’t paying you interest on that money.

Now, I don’t know about you but I’m not all about lending money at zero interest*. I want my money to be out there in the world working for me, generating returns.

So if the idea of extending the government an interest-free loan is as unpalatable to you as it is to me, contact me today and we can strategize how to minimize how much you pay the government so that you can hold on to your money longer.

*The one time it might be a good idea to overpay the government is if you have difficulty saving money. In this way, intentionally overpaying the government may be a good idea, as it is kind of like a “forced” savings account. If you have difficulty controlling your spending, increasing your withholding you pay to the government may be a creative idea to help you save. However, this is only a temporary strategy as you will get that refund check and then you’ll face a similar challenge of controlling how you spend that.