There are many types of taxpayers, but three common categories are:
A. Those who are getting a refund which is “our money” back.
B. Those who are getting their own money back and think it’s a refund but it’s really not.
C. Those who are paying in, and not getting a refund.
The first are the group of Americans we support as a society and for whatever reason, and whether they are hard working or not are earning under a livable wage, so we supplement their annual income with credits. Depending on the number of children and other factors, we give them more back than they have paid or had withheld.
The next group have worked and had withholding or had passive income, retirement income, even social security income with withholding. This group often also over withholds and always get a good size refund by design. They send too much in to the government all year and then ask for the overage back by filing their tax returns. Many times this group has been told by tax preparers that they should reduce withholding because the government doesn’t pay interest. The common response is that it is a forced plan of savings, a kind Christmas club, but after Christmas. It is used to pay holiday charge cards, the property tax bill, etc… I’ve even heard “It’s my winter money for food and heat” from seasonal employees that have no or little income in winter.
I’ll start by saying “well at least you are saving and have a plan, congratulations and THANK YOU!”
That said though, STOP IT! With our electronic paycheck world, it would be rare that you could not very easily set up a similar type of saving to the IRS withholdings by simply sending it to a bank account, second savings account or other place that is not the US Government.
The shutdown is a reminder, you are not saving with a good creditor, a highly rated insurance company, a behemoth stock broker like Vanguard. Instead, your having a bankrupt entity that has to vote to borrow more every year on its credit cards, with a current unpaid balance of almost $22,000,000,000 (the national debt). Then, there is the “off the books additional debt”: The underfunded Social Security, Medicare and other liabilities, that add roughly another $80,000,000,000 to that.
The IRS savings plan pays no interest and yes, for a very long time the interest on savings was 0%, but now rates have risen to 2% or even 3%, so that option provides two incentives. First, you’ll earn interest where the IRS pays NONE. Second, you won’t find yourself in the middle of a potential problem without access to your savings. So far, the IRS says they will open and accept tax returns on January 28th, but they have not said they will be sending refunds at the same speed as usual. It would easily have been possible that they would not even have opened until after the shutdown is over, which would have meant an even bigger inconvenience.
Punchline: Go change your withholding to come out to what you will likely owe or just a bit more. Have the rest diverted to something you have control over. You’ll earn money on it and you’ll be safer. You could even have the money go to a parent or siblings account if you are afraid of your own restraint in not spending it, but saving with the IRS is the equivalent of saving with a “Drunk Uncle”.