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Despite the news that more tax paying Americans will have to pay more taxes due to Trump’s “tax cut,” many people are anticipating their tax refund. What has been celebrated as “bonus money,” is actually a financial facade of a bigger issue. The most common cause of a tax refund is tax credits, like the Earned Income Tax Credit (EITC), for low-income households, particularly with children. Also, entrepreneurs and homeowners are able to leverage qualified tax deductions, which can produce hefty tax refunds. However, if you receive a large tax refund, but do not qualify for the EITC and are not a home or business owner, then, Houston, we (may) have a problem, as the saying goes. Here’s why getting a tax refund is not always good.
3 Reasons Why Getting a Tax Refund is Not Always Good:
Gives the Government an Interest-Free Loan
Outside of tax credits, like the EITC, or business and homeowner tax deductions, a tax refund is the payment of overpaid taxes to the government throughout the year by an individual or household.
“Essentially, a tax refund is an interest-free loan that consumers give to the government,” explains Edeline Dryden, CEO of Dryden Tax & Accounting Services.
Cheats You of Needed Cash
As workers wait for their tax refund, they are giving the government the use of their hard earned money to run or “shutdown” the government. This leaves many workers to struggle financially, living paycheck to paycheck throughout the year.
The amount of income from the paycheck withheld for taxes is determined by the W-4 completed when hired. The reality is the last time the W-4 was updated was when the person started their job.
Neglecting to update or complete the W-4 correctly can cause the over payment of taxes to the government.
Dryden suggests “Review and/or update your W-4 at least annually, as necessary. The goal is to keep that income in your paycheck to use throughout the year.”
More Money Magnifies Bad Money Behaviors
As Biggie Smalls said, “More money, more problems.” If a person has poor spending habits, having access to more money will just magnify that bad behavior. Even with good intentions of saving and paying off debt, financial fornicators may surrender to the temptation of excessive spending of the “bonus money.”
“If spending habits are questionable,” Dryden advises “divide the refund into three even categories. These categories can include savings for emergencies, debt repayment, and spending for pleasure or necessity.”
By breaking the refund into these three categories, you will start a savings safety net, knock down some debt, and enjoy some of the cash so you won’t feel deprived.
Dryden also shares a few ways to make sure you get the most out of your paycheck throughout the year:
Adjust withholding to get your money throughout the year
If you have life changes, like a marriage, divorce, birth or adoption of a child, death of a spouse or child, or even an income change (i.e., pay raise); your W-4 should be updated appropriately. This will ensure that your employer is not withholding more than necessary.
“The real winner of the tax game is the person who doesn’t owe taxes or gets minimal or no refund.” Dryden explains, “This means they kept their income throughout the year.”
Dryden recommends speaking with a tax accountant or tax professional for assistance in completing the W-4 correctly.
Use the extra income to pay off debt or build your emergency fund faster
“Use that extra income in your paycheck to pay off debt or to build your emergency savings fund.” says Dryden.
The importance of having an emergency fund was realized when over 800,000 federal workers and contractors did not receive paychecks for over 30 days due to the government shut down. The extra income is an excellent opportunity to build a savings fund for unexpected emergencies, job loss, etc.
The extra income can also be used to pay down debt to produce more future disposable income.
Use the extra income to invest
Some people try to rationalize a tax refund as a forced savings technique.
Instead of giving the government an interest-free loan, keep that extra income throughout the year to invest and earn more money.
“Increase your contribution to your Employer-Sponsored Retirement Account, like a 401K, 403B, 457, Thrift Savings, etc.,” recommends Dryden. “Or set up a direct deposit or automatic transfer to a brokerage account. Instead of buying stuff — buy stock.”
Dryden recommends speaking with your employer’s retirement investment administrator or a licensed investment adviser for assistance with stock investments.
Black Enterprise Contributors Network
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Sarah Witter had to pay for a second surgery to repair her broken leg after a metal plate installed during the first surgery broke. On Friday, she got a more welcome break — a $ 6,358.26 refund from the hospital and her insurer.
Witter’s experience was the subject of December’s KHN-NPR “Bill of the Month” feature. She and her insurer, Aetna, had racked up $ 99,159 in bills from a Rutland, Vt., hospital and various medical providers after she fractured her leg in a skiing accident last February.
A surgeon at Rutland Regional Medical Center implanted two metal plates, attached to her leg bones to help them heal. Less than four months later, one of these plates broke, requiring her to have a second surgery to replace the plate. Witter, who is 63, ended up paying $ 18,442, mostly to the hospital, for her portion of the total cost for all her care from the hospital, doctors, emergency services and physical therapists.
After KHN contacted Aetna about these costs, the insurer noticed that Rutland Regional had billed Witter for the difference between what it charged for its services and what Aetna considered an appropriate price for the first surgery. Those additional charges are known as “balance bills” and occur when a medical provider is not in the insurer’s network and has no contract with the insurer. Rutland Regional is not in Aetna’s network. In our original story, KHN had calculated $ 7,410 in balance bills.
Aetna said it contacted the hospital and negotiated a compromise in which the insurer paid the hospital nearly $ 3,800 and the hospital waived the remainder of the charges to Witter that Aetna considered unreasonably high.
“As part of her benefits plan, Sarah’s claims in question went through a patient advocacy process that allows us to negotiate with the provider on the member’s behalf to resolve any balance billing issues,” a spokesman wrote.
Aetna said it will negotiate disputed bills for any of its customers who request assistance, and also help schedule appointments, get services authorized and deal with other non-medical complications. However, an Aetna spokesman wrote, “we weren’t fully aware of all of the bills that Sarah had received before we received them from you/her.”
On Friday, Rutland Regional again declined to discuss Witter’s account. Witter said she learned of the refund during a meeting, at Rutland Regional’s invitation, with a hospital financial administrator.
“They went through all the costs and I guess treated it [the first surgery] more like it was a hospital service that was within my contract,” she said. The administrator told her they had “reprocessed” the charges from her second surgery, but that her portion of the bill did not change, she said.
“It’s good news — who doesn’t like getting money back? But I don’t quite understand,” she said. “If it’s that easy for them to reprocess this billing to get me this, then it’s obvious that everything is really arbitrary.”
One difference between the two surgeries was the first one was conducted during a crisis after Witter was admitted to the hospital through the emergency room. Balance bills in those circumstances are the most difficult to justify because patients with injuries that require immediate care, such as a heart attack or car accident, are usually taken to the closest medical facility. Patients are not in a position to figure out where the closest in-network alternative is.
Neither Witter’s hospital nor her insurer budged on her underlying complaint: that she shouldn’t have had to pay for second surgery, which cost $ 43,208, because one of the plates — known as a bone fixation device and manufactured by Johnson & Johnson’s DePuy Synthes — broke.
Device manufacturers generally do not offer warranties for hardware devices once they have been implanted, saying that device failure can be due to a variety of factors beyond the company’s control. Those include poor implantation by the surgeon; bones that fail to heal and subject the device to unremitting strain, causing metal fatigue; or patients who apply too much weight or movement on the bone despite instructions not to.
DePuy, which declined to comment for this story, earlier said that device failures occur in “rare circumstances.” In its instructions for surgeons, DePuy noted: “It is important to note that these implants may break at any time if they are subjected to sufficient stresses.”
Witter said her surgeon was present at her meeting at Rutland Regional and told her that “the fact the bone hadn’t completely healed yet was part of the problem.” She said she has not been able to find a contact for the device manufacturer so she can complain about it breaking.
Even after she receives her refund next week, Witter still will have paid $ 12,084 for her broken limb. Asked her advice for other patients dealing with bills they consider excessive, she said: “Don’t break your leg.”
Do you have an interesting or outrageous medical bill you’d like KHN and NPR to examine? Tell us about it!
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