by Stan Dyer

Created on: March 30, 2007   Last Updated: May 21, 2007

Every year around this time, those familiar words start to pop-up. The words are "tax refund" and "deduction" usually heard in association with other words like "big" or "more". It is as if some marketing agency is trying to convince us that a tax refund is a good thing. In fact, many people do believe the myth that a tax refund is a good thing. The truth is that a tax refund, (or any refund for that matter), is simply our own money that we are allowed to have back.

People talk about refunds as big windfalls, free money, or a lottery win. They are nothing like that. Consider this, if a person purchased $20 worth of grocery at the grocery store, and paid for it with a $100 bill, do you think he would get excited when the clerk gave him $80 change? He would be more likely to get excited if he got less than $80 change. To make the analogy better, consider if we paid our entire year's grocery bill only once a year. Each month during the year, we paid small installments on the big bill and then, in the middle of April, we settled our accounts. Isn't that a lot like how it is done with income taxes? The average income tax refund is around $2400. Would we get as excited about a refund that big if it were coming from the grocery store? If we divide by 12, we see that we overpaid our grocery bill by $200 a month. That would surely raise my eyebrows, but people do not seem to think much about it when it is their income taxes, and rather seem to look forward to it. It seems to me that money could be better spent or put to better use even if it were only put in an interest bearing savings account. It is true the interest would not amount to a whole lot, but at least it would be money earned and not just our own money given back to us as if it were some great prize. We can also look at tax deductions in much the same light.

People see tax deductions much as they see tax refunds. It is as if these things are our rich relations come to visit once a year bearing gifts. A tax deduction is simply an amount of our own money that we are allowed to exempt from taxation. It is not new money and it is not a gift. Just like a refund, it is money we already earned and already own. Depending on a person's tax bracket, a deduction is only worth as much as the percentage rate of taxation. For example, using the tax rate schedule from page 84 of the IRS booklet of forms and instructions for Form 1040, it shows people pay either 10%, 15%, 25%, 28%, 33% or 35% with the lowest earners paying

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