Hello and welcome back to Azazel Podcast. In this series, I explore the tax refund program. What is it and how can we convert it into a dividend bearing investment account?
Join me and let’s dive to find out how to no longer the IRS withhold our tax refund. I will show you a financial strategy to increase your monthly paychecks and invest your extra funds to become co-owners of the most profitable business in America.
Arguments over the progressive American tax system place the income tax rate at the root of American poverty. They claim that Americans struggle to achieve the American Dream because of high taxes. Moreover, these arguments found that Americans’ purchasing power decreases as the government increases the income tax rate. However, agreeing that paying taxes is here to stay, these arguments are yet to propose a comprehensive approach to allow Americans to earn interests or dividends on their tax refund. This opinion fills the gap by recommending that Americans claim more tax exemptions on their W-4 to increase their monthly revenues and for companies to establish partnerships with businesses to invest the extra funds their workers would earn on their paychecks. In terms of implications for social change, these two recommendations would allow taxpayers to become co-owners and investors to generate profits from funds that the government would otherwise hold and reimburse to them without profits. at the beginning of the year.
Employees with less withholdings receive larger tax refunds at income tax seasons. Most of the American workforce fall into that line of fiscal practice detrimental to their purchasing power. Unbeknownst to them or for lack of education on how to properly file their yearly income taxes, they receive large tax refunds because they overpay their income tax every year. The government holds their overpayment for a year and refunds them without interest. Such a fiscal policy is a poor use of such funds whose value changes over time and does not keep up with inflation.
Tax refund is like a no-interest-bearing savings account that salaried workers open with the Internal Revenue Services. The way is that employers withhold money from employees’ earnings. The employers send the withholdings to the IRS and the IRS sends them to the employees when they file their income tax.
Limitations and Delimitations:
This opinion is limited to tax refund; the lump sum Americans receive from the government after they pay all their income tax. It did not discuss income tax, which is money individuals pay the government on their income. It did not cover sales tax and property tax, which are, respectively, money Americans pay on what they buy and on what they own. Moreover, it did not cover tax incentives or refundable tax credits such as the Earned Income Tax Credit (EITC), premium tax credit (PTC), or Child Tax Credit (CTC).
I limited my proposal to only tax refunds due to overpayment. Americans can avoid lending that money to the government and ultimately invest it to earn residual income by claiming various exemptions in their W-4. In this opinion, I explained the strategy to transform tax refunds from an interest-free loan to the government into an investment in the most profitable businesses in America.
Income Tax and Tax Refund
The income tax is money that the American workers and businesses pay to the federal and state governments on their income. Therefore, the income tax is composed of individual and corporate income taxes.
The government levies an individual income tax, also called personal income tax, on wages, salaries, investments, or other forms of income the individual earns. The bigger an individual’s earnings, the more income tax he pays to the government due to the progressivity of the American tax system. The tax bracket rates for individual income are between 10% and 37%.
The government levies corporate income tax on business profits. C corporations pay the corporate income tax, while partnerships, S corporations, LLCs, and sole proprietorships do not pay the corporate tax. Their profits are “pass-through” to their owners, who pay individual income tax on earnings they make from their business (German & Parrilla, 2021). According to Schaul (2022), C-Corporations pay an average flat rate of 21%. In contrast, owners of S corporations, LLCs, and sole proprietorships fall into the 10% to 37% brackets, meaning that their individual income tax rate increases as their income increases (Horowitch & Lawder, 2022).
The tax refund is the lump sum Americans receive from the Internal Revenue Service after they file their income tax. Many tend to believe that the tax refund is an earning, a bonus, or a gift from the government. It is instead a reimbursement to Americans who overpay their income tax. One overpays their income tax when they fail to claim specific allowances and exemptions or when they improperly fill their W-4 form at the time of their hiring. Although, throughout their career, change occurs, like childbirth, daycare, marriage, divorce, etc., they did not claim the proper exemptions, which would have added extra money to their paychecks.
The tax refund amount is not synonymous with the tax bracket in which employees fall; it is, however, linked to how many exemptions they claim or do not claim. Americans receive a tax refund for overpaying their taxes during the previous year. By updating or adequately filling out their W-4 or precisely calculating their estimated taxes, Americans can have their tax refund as close to zero as possible or have a higher withholding and lower tax refund at tax time. In simpler terms, as Johnson (2022) said, the closer employees get their refund to zero, the more money they will have throughout the prior year.
Employees file the IRS W-4 tax form, also called Employee’s Withholding Allowance Certificate to indicate to their employers how much money from their paychecks to withhold. The amount of money withheld from their paychecks depends on the number of claimed exemptions and allowances (Kagan, 2020). Employees must update or file a new W-4 each time their circumstances change, such as the birth of a new child, home purchase, or a new job.
In the most layman term, this opinion proposes the Taxpayer Investment and Transformation Strategy (TITS) as an approach for employees to claim the proper exemptions and allowances to receive extra money on their monthly paychecks. However, their employers will keep the extra cash to reinvest them into businesses overseen by financial experts and investment advisors.
There is no legal obligation for employees to claim their children as exemptions on their W-4, nor is it illegal to add more dependents or add them as they come throughout the year to increase their monthly paychecks.
An employee had a child when she started her job. If she does or adds more children throughout her career, she will receive monthly money for her family from the IRS. However, if she does not, she will receive less money monthly but will get to claim her child or her children when she files her income tax and then she will receive a lump sum for her family. Her exemption or the number of exemptions she might add later does not impact her income tax rate, meaning that if her income is $50,000 a year, even if she has five dependents, her income tax rate will remain at 22% (Waggoner, 2022).
Two different employees with a single filing status and the same salary of $100,000 a year are in the same tax bracket whether employee 1 is childless or employee 2 has children. Conversely, if employee 1 is still single, has one child and employee 2, still single, has 2 children or more; they will be, unrelatedly, in the same tax bracket. However, if employee 1 is married and employee 2 is single, they will be in different tax brackets because the American income tax rate depends on whether they are married or single, not on the dependents they may have. However, the tax refund amount is based on exemptions or dependents although there is a limit to the number of dependents or the ages of dependents that employees can claim.
The Taxpayer Investment and Transformation Strategy (TITS)
As employees are educated on the proper way to fill out their W-4, their companies will seek out investment partnerships with businesses in which for their employees to invest the extra funds they would have otherwise received in the form of a tax refund. Employees will invest their supplementary funds in different entities and securities to build and diversify their portfolio. Employees can opt-out of the program, meaning elect to receive their extra funds on their paychecks or select companies to invest their additional incomes.
The TITS will empower employees, regardless of their income, to become investors or co-owners of the most profitable businesses in America instead of having their earnings sit in IRS coffers and later receive them without bearing any interests. The proposed strategy aimed to transform income tax refunds from interest-free withholdings to dividend-bearing investments.
The income tax, based on salaries, is money that American workers pay the federal or state government on their earnings. In contrast, tax refunds, based on exemptions, are money the government reimburses American workers for overpaying their income tax. The bigger one’s tax refund, the more they overpaid the government.
This opinion established the difference between income tax and tax refund. It recommended a financial strategy to transform taxpayers into investors and co-owners. Taxpayers would implement this by investing the extra funds they earn after they master the required instruction to file their W-4 correctly.