WEBVTT 00:00:00.000 --> 00:00:03.299 Okay, let's unpack this thing that, I mean, almost 00:00:03.299 --> 00:00:05.400 every single working adult has gone through, 00:00:05.459 --> 00:00:08.460 but very few of us, you know, really get. We're 00:00:08.460 --> 00:00:11.439 talking about the tax refund. Right. And just 00:00:11.439 --> 00:00:14.980 to be super clear from the get -go, we are not 00:00:14.980 --> 00:00:17.480 talking about the document you file. That's your 00:00:17.480 --> 00:00:21.100 tax return. A crucial distinction. Yeah. It gets 00:00:21.100 --> 00:00:22.960 mixed up all the time. We're talking about the 00:00:22.960 --> 00:00:25.309 actual money. The repayment that hits your bank 00:00:25.309 --> 00:00:27.690 account. Exactly. The refund is just that. It's 00:00:27.690 --> 00:00:30.489 a repayment because your tax liability, what 00:00:30.489 --> 00:00:33.549 you actually owed for the year, was less than 00:00:33.549 --> 00:00:35.490 what you'd already paid in. Usually through your 00:00:35.490 --> 00:00:37.329 paycheck. Usually through payroll withholding, 00:00:37.329 --> 00:00:39.750 yeah. You basically gave the government more 00:00:39.750 --> 00:00:42.350 money than they were entitled to keep. And when 00:00:42.350 --> 00:00:45.030 we say overpaying, we are talking about, well, 00:00:45.149 --> 00:00:47.509 just massive amounts of money. Not just here 00:00:47.509 --> 00:00:50.280 in the U .S., but globally. To hook you right 00:00:50.280 --> 00:00:51.960 away, let's just look at the scale here. It's 00:00:51.960 --> 00:00:54.619 pretty staggering. In 2023, the IRS refunded 00:00:54.619 --> 00:00:59.119 something like $198 .9 billion to taxpayers. 00:00:59.460 --> 00:01:03.420 Wow. Nearly $200 billion just flowing back out. 00:01:03.880 --> 00:01:06.480 That number really sets the stage perfectly for 00:01:06.480 --> 00:01:08.859 what we're doing here. So our mission in this 00:01:08.859 --> 00:01:11.319 deep dive is really tailored for you, the listener. 00:01:11.500 --> 00:01:13.739 We want to get into the nitty gritty, the mechanics, 00:01:14.000 --> 00:01:17.299 the money, and maybe most importantly, the strategies 00:01:17.299 --> 00:01:20.359 behind managing that excess cash. Yeah. And to 00:01:20.359 --> 00:01:23.579 do that, we've pulled together a really comprehensive 00:01:23.579 --> 00:01:26.819 global overview. We're looking at key differences 00:01:26.819 --> 00:01:29.560 in how it's all administered, the timing, optimization 00:01:29.560 --> 00:01:33.159 strategies across the U .S., Canada, the U .K. 00:01:33.159 --> 00:01:37.099 New Zealand, Ireland, even India. You really 00:01:37.099 --> 00:01:38.439 want to know where the money goes and how to 00:01:38.439 --> 00:01:41.060 get it back. Exactly. And, you know, before we 00:01:41.060 --> 00:01:42.920 dive into all the mechanics, we have to touch 00:01:42.920 --> 00:01:44.879 on this sort of philosophical question that really 00:01:44.879 --> 00:01:46.799 shapes your whole financial strategy around this. 00:01:46.920 --> 00:01:49.760 Which is? When you get that refund check, especially 00:01:49.760 --> 00:01:51.620 if it's a big one, are you getting a fantastic 00:01:51.620 --> 00:01:54.459 windfall? Or is it just your own money coming 00:01:54.459 --> 00:01:57.640 back to you late and in most places without any 00:01:57.640 --> 00:02:01.030 interest? Ah, the interest -free loan. That idea 00:02:01.030 --> 00:02:02.849 is going to be pretty central to this whole conversation, 00:02:03.030 --> 00:02:05.030 I think. So let's start there. Let's dive into 00:02:05.030 --> 00:02:07.409 the U .S. experience first, because the history 00:02:07.409 --> 00:02:10.930 and the sheer scale of this is fascinating. When 00:02:10.930 --> 00:02:13.090 we're talking about the U .S. tax system, getting 00:02:13.090 --> 00:02:15.870 a refund isn't just common. Historically, it's 00:02:15.870 --> 00:02:18.150 really been the norm. The default outcome. Pretty 00:02:18.150 --> 00:02:21.750 much. The IRS data shows this really high prevalence. 00:02:22.300 --> 00:02:26.879 If you go back to 2004, a huge 77 % of all tax 00:02:26.879 --> 00:02:29.599 returns filed resulted in a refund check. Wow, 00:02:29.680 --> 00:02:33.139 77%. So nearly three out of every four people 00:02:33.139 --> 00:02:35.780 filing got money back. Which really suggests 00:02:35.780 --> 00:02:39.099 the system is structurally biased toward over 00:02:39.099 --> 00:02:40.680 -withholding. Well, that makes sense from the 00:02:40.680 --> 00:02:42.219 government's perspective, right? It guarantees 00:02:42.219 --> 00:02:45.139 them consistent cash flow. But even if the percentage 00:02:45.139 --> 00:02:48.039 of people getting refunds stays high, the actual 00:02:48.039 --> 00:02:51.199 dollar amount? That seems to change all the time. 00:02:51.240 --> 00:02:54.620 It's driven by the economy and I guess by what's 00:02:54.620 --> 00:02:56.919 happening in Washington. Oh, absolutely. Looking 00:02:56.919 --> 00:02:59.219 at the trends gives you this incredible snapshot 00:02:59.219 --> 00:03:02.479 of American finances. Let's just track the average 00:03:02.479 --> 00:03:05.120 refund for a minute. In 2011, the average was 00:03:05.120 --> 00:03:09.319 a pretty hefty $2 ,913. Okay, almost three grand. 00:03:09.479 --> 00:03:12.379 Yeah. By 2017, it had dipped a little, down to 00:03:12.379 --> 00:03:16.259 $2 ,035. That 2011 number, though, that's a decent 00:03:16.259 --> 00:03:18.080 chunk of change. That's a vacation or paying 00:03:18.080 --> 00:03:21.020 off a big credit card bill. But the real shock, 00:03:21.099 --> 00:03:23.639 the real shakeup came in the 2018 filing season, 00:03:23.780 --> 00:03:25.500 didn't it? Reflecting what happened the year 00:03:25.500 --> 00:03:27.939 before. That's right. That's the one. The average 00:03:27.939 --> 00:03:32.889 refund in 2018 just plummeted down. to $1 ,865. 00:03:33.770 --> 00:03:36.889 Whoa. That was an 8 % drop year over year. An 00:03:36.889 --> 00:03:40.289 8 % drop in a single year. That is a fundamental 00:03:40.289 --> 00:03:42.689 financial change for millions of families. I 00:03:42.689 --> 00:03:45.030 mean, the average filer was short about $170 00:03:45.030 --> 00:03:47.389 that they were probably counting on. So what 00:03:47.389 --> 00:03:49.830 happened? What caused that big of a drop so suddenly? 00:03:50.030 --> 00:03:52.330 That was a direct result of what our sources 00:03:52.330 --> 00:03:54.930 call the most sweeping changes to the tax credit 00:03:54.930 --> 00:03:58.129 in 30 years. The Tax Cuts and Jobs Act of 2017. 00:03:58.430 --> 00:04:02.490 The TCJA. The TCJA, exactly. It just fundamentally 00:04:02.490 --> 00:04:05.710 rewired how withholding was calculated. For example, 00:04:05.810 --> 00:04:08.159 the standard deduction went way up. Which meant 00:04:08.159 --> 00:04:10.099 fewer people were itemizing their deductions. 00:04:10.300 --> 00:04:12.319 Right. And because of those changes, the IRS 00:04:12.319 --> 00:04:14.439 updated its withholding tables that employers 00:04:14.439 --> 00:04:17.699 use. The idea was to make withholding more accurate 00:04:17.699 --> 00:04:19.879 so people's paychecks would be slightly bigger 00:04:19.879 --> 00:04:21.920 throughout the year, but their refunds would 00:04:21.920 --> 00:04:24.439 be smaller. So people were paying less in tax 00:04:24.439 --> 00:04:27.540 overall, but the system was trying to take out 00:04:27.540 --> 00:04:30.339 an amount closer to their actual liability. Precisely. 00:04:30.339 --> 00:04:32.180 They weren't overwithholding as dramatically 00:04:32.180 --> 00:04:34.079 as they used to. The problem was communication. 00:04:34.279 --> 00:04:37.000 The IRS tried to get the word out, but, you know. 00:04:37.069 --> 00:04:39.689 People are creatures of habit. They expected 00:04:39.689 --> 00:04:41.930 their usual big refund, and they were shocked 00:04:41.930 --> 00:04:44.230 when the checks were so much smaller. And it's 00:04:44.230 --> 00:04:46.069 important to say the average has bounced back 00:04:46.069 --> 00:04:50.629 a bit since then. It landed at $2 ,878 in 2023. 00:04:51.089 --> 00:04:54.870 It did, but even that 2023 number was a $297 00:04:54.870 --> 00:04:58.370 decrease from the year before, from 2022. It 00:04:58.370 --> 00:05:00.649 just reminds us how volatile these figures are. 00:05:00.930 --> 00:05:03.230 So no matter what the average is in a given year, 00:05:03.449 --> 00:05:07.269 the basic reason why people overpay... That stays 00:05:07.269 --> 00:05:09.829 pretty consistent. And you said there are two 00:05:09.829 --> 00:05:13.110 main drivers for those huge U .S. refunds that 00:05:13.110 --> 00:05:14.870 we really need to understand. That's right. Two 00:05:14.870 --> 00:05:17.529 primary drivers. So let's nail those down for 00:05:17.529 --> 00:05:19.439 everyone listening. OK, the first one is just 00:05:19.439 --> 00:05:21.879 the basic mechanics of how withholding is calculated. 00:05:22.120 --> 00:05:24.800 It's based on this idea of annualization. Annualization. 00:05:24.800 --> 00:05:27.879 Yeah. Your employer looks at what you earn in 00:05:27.879 --> 00:05:30.959 a single pay period and then basically calculates 00:05:30.959 --> 00:05:32.959 what your total earnings would be if you made 00:05:32.959 --> 00:05:35.680 that amount for a full 12 months. They withhold 00:05:35.680 --> 00:05:39.610 tax based on that annualized income. OK, so can 00:05:39.610 --> 00:05:41.810 you give us a concrete example of how that assumption 00:05:41.810 --> 00:05:44.449 can lead to a really big overpayment? Absolutely. 00:05:44.790 --> 00:05:47.209 Let's say someone starts a new job. It pays $50 00:05:47.209 --> 00:05:49.970 ,000 a year, but they don't start until October. 00:05:50.310 --> 00:05:52.670 So by the end of that calendar year, they're 00:05:52.670 --> 00:05:56.160 only going to have earned $12 ,500. And this 00:05:56.160 --> 00:05:58.959 is the key. Every single paycheck they get from 00:05:58.959 --> 00:06:01.620 October to December, their payroll system is 00:06:01.620 --> 00:06:04.160 withholding tax as if they're going to earn the 00:06:04.160 --> 00:06:07.160 full $50 ,000. So the system is taxing them based 00:06:07.160 --> 00:06:08.939 on a salary they haven't actually earned yet 00:06:08.939 --> 00:06:11.519 for that year. Precisely. It's withholding tax 00:06:11.519 --> 00:06:14.300 at a rate that's appropriate for a $50 ,000 income, 00:06:14.500 --> 00:06:16.819 even though their actual income is way lower, 00:06:17.000 --> 00:06:19.779 putting them in a much lower tax bracket. So 00:06:19.779 --> 00:06:22.899 way more tax gets withheld than is actually owed. 00:06:23.199 --> 00:06:25.620 And that creates a big refund when they file. 00:06:26.089 --> 00:06:27.790 And this would apply to anyone who was unemployed 00:06:27.790 --> 00:06:29.870 for part of the year or had a big life change, 00:06:29.949 --> 00:06:32.029 right? Exactly. The whole system is basically 00:06:32.029 --> 00:06:35.129 designed to err on the side of caution. It protects 00:06:35.129 --> 00:06:37.329 the government's revenue by overwithholding, 00:06:37.329 --> 00:06:40.430 which in turn guarantees a massive pool of money 00:06:40.430 --> 00:06:43.129 for the Treasury to use all year. Okay, so that's 00:06:43.129 --> 00:06:45.769 driver number one, the annualization calculation. 00:06:46.230 --> 00:06:48.470 What's the second big one? The second major driver, 00:06:48.589 --> 00:06:50.879 and this is one that... can result in a refund 00:06:50.879 --> 00:06:53.860 even if you owe zero income tax is the earned 00:06:53.860 --> 00:06:56.500 income tax credit, the EITC. We hear about the 00:06:56.500 --> 00:06:59.079 EITC all the time. Break it down for us. Why 00:06:59.079 --> 00:07:02.060 is it such a massive driver of refunds? So the 00:07:02.060 --> 00:07:05.939 EITC is a refundable credit. And that word refundable 00:07:05.939 --> 00:07:09.300 is everything. It's designed to help low to moderate 00:07:09.300 --> 00:07:12.379 income working people. Now, most tax credits 00:07:12.379 --> 00:07:17.199 just reduce the tax you owe down to zero. A refundable 00:07:17.199 --> 00:07:20.100 credit, though, means if the credit is worth, 00:07:20.259 --> 00:07:25.279 let's say, $2 ,000, but you only owed $500 in 00:07:25.279 --> 00:07:27.420 tax. You get the difference back. You get the 00:07:27.420 --> 00:07:30.100 difference of $1 ,500 back as a cash payment. 00:07:30.500 --> 00:07:33.319 This is the mechanism that creates those huge 00:07:33.319 --> 00:07:36.660 refund checks for millions of Americans, making 00:07:36.660 --> 00:07:38.879 it a critical source of income. That refundable 00:07:38.879 --> 00:07:41.519 part just completely changes the math for lower 00:07:41.519 --> 00:07:44.980 income folks. And this whole analysis of why 00:07:44.980 --> 00:07:47.290 the money comes back? It leads us right back 00:07:47.290 --> 00:07:49.230 to that philosophical debate you mentioned. The 00:07:49.230 --> 00:07:51.509 interest -free loan debate. Exactly. And this 00:07:51.509 --> 00:07:53.370 is, you know, the real friction point for anyone 00:07:53.370 --> 00:07:55.250 who thinks about finance and opportunity cost. 00:07:55.470 --> 00:07:58.009 So if you got a big refund, let's use that 2011 00:07:58.009 --> 00:08:02.110 average, $2 ,913. That money was just sitting 00:08:02.110 --> 00:08:03.870 in the government's account doing nothing for 00:08:03.870 --> 00:08:06.529 you for maybe 15 months. From the start of the 00:08:06.529 --> 00:08:08.610 tax year until you get the check -in, say, April. 00:08:08.810 --> 00:08:11.350 Right. You have essentially given the U .S. government 00:08:11.350 --> 00:08:14.139 a zero -interest loan for over a year. And you 00:08:14.139 --> 00:08:16.279 have to think about the opportunity cost. That's 00:08:16.279 --> 00:08:18.420 the term. What could you have done with that 00:08:18.420 --> 00:08:22.620 money if you'd just had that $2 ,913 and put 00:08:22.620 --> 00:08:24.740 it in a high -yield savings account, earning, 00:08:24.860 --> 00:08:29.139 say, a modest 5%, which you can get today? You'd 00:08:29.139 --> 00:08:31.899 have made about $150 in interest. At least. And 00:08:31.899 --> 00:08:34.059 if you'd invested it, the potential lost earnings 00:08:34.059 --> 00:08:37.460 are even bigger. So the argument is a big refund 00:08:37.460 --> 00:08:39.980 is actually a sign of poor financial planning. 00:08:41.569 --> 00:08:44.129 willingly gave up your own money, your liquidity, 00:08:44.309 --> 00:08:47.110 and potential investment returns, all to help 00:08:47.110 --> 00:08:48.809 the governance balance sheet instead of your 00:08:48.809 --> 00:08:51.509 own. That is the rational, you know, the optimized 00:08:51.509 --> 00:08:54.590 financial viewpoint. But, and this is a really 00:08:54.590 --> 00:08:57.350 important but, there's a very strong counterpoint, 00:08:57.509 --> 00:09:00.470 and it's rooted in human behavior. A lot of people 00:09:00.470 --> 00:09:02.870 want that big refund. They actively prefer it. 00:09:02.970 --> 00:09:04.889 They use it as a kind of forced savings account, 00:09:04.970 --> 00:09:07.549 right? With the IRS acting as their, I don't 00:09:07.549 --> 00:09:10.029 know, their very strict bank manager. Yeah. Yes. 00:09:10.490 --> 00:09:12.210 They know they're overpaying, but they also know 00:09:12.210 --> 00:09:14.549 they lack the discipline to save that money bit 00:09:14.549 --> 00:09:17.009 by bit themselves. So they prefer the security 00:09:17.009 --> 00:09:19.909 of getting that one big lump sum back every spring. 00:09:20.070 --> 00:09:22.730 They use it for big ticket items, a down payment 00:09:22.730 --> 00:09:25.529 on a car, a new roof, paying off high interest 00:09:25.529 --> 00:09:28.549 debt. That psychological security is a really 00:09:28.549 --> 00:09:31.070 powerful economic force. And there's also the 00:09:31.070 --> 00:09:32.990 fear factor, too. The fear of the alternative. 00:09:33.169 --> 00:09:35.289 Exactly. What if you try to get your withholding 00:09:35.289 --> 00:09:38.250 perfect? You aim for zero and you mess up. You 00:09:38.250 --> 00:09:40.429 end up owing the IRS a bunch of money at tax 00:09:40.429 --> 00:09:42.389 time and you might not have the cash to pay. 00:09:42.590 --> 00:09:44.929 That's a huge stress. Yeah. That would be a nightmare 00:09:44.929 --> 00:09:47.590 for a lot of people. So for many, the guaranteed 00:09:47.590 --> 00:09:51.009 lump sum refund is just. It's better for their 00:09:51.009 --> 00:09:52.850 peace of mind than the risk of scrambling to 00:09:52.850 --> 00:09:56.149 find $3 ,000 by April 15th. It's a tradeoff. 00:09:56.210 --> 00:09:58.289 You're trading optimal financial returns for 00:09:58.289 --> 00:10:01.570 minimal annual stress. OK, so if you're the kind 00:10:01.570 --> 00:10:04.090 of person listening to this who falls into that 00:10:04.090 --> 00:10:07.450 first camp, the maximized liquidity camp, you 00:10:07.450 --> 00:10:09.769 want to avoid the interest free loan. So how 00:10:09.769 --> 00:10:12.210 do you actually do that? The first step is figuring 00:10:12.210 --> 00:10:14.950 out what the optimal result even is. And you 00:10:14.950 --> 00:10:18.950 said it's not zero. Correct. The goal is to maximize 00:10:18.950 --> 00:10:21.629 your own cash flow during the year without getting 00:10:21.629 --> 00:10:24.129 slapped with a penalty by the government. So 00:10:24.129 --> 00:10:27.590 optimally, your tax return should end with you 00:10:27.590 --> 00:10:29.870 owing a small amount of money just under whatever 00:10:29.870 --> 00:10:32.450 the penalty charge threshold is. OK, so owing 00:10:32.450 --> 00:10:34.710 a little bit is actually the sweet spot. It is. 00:10:34.850 --> 00:10:36.750 It means you have the maximum use of your own 00:10:36.750 --> 00:10:38.809 money all year long without getting in trouble 00:10:38.809 --> 00:10:40.750 with the IRS. So what is that penalty threshold? 00:10:40.970 --> 00:10:43.269 This is the nuance that I think a lot of people 00:10:43.269 --> 00:10:45.559 miss. Right. This is where it gets a little complex, 00:10:45.620 --> 00:10:47.820 but it's crucial. The penalty kicks in if you 00:10:47.820 --> 00:10:49.720 haven't paid enough tax during the year through 00:10:49.720 --> 00:10:51.659 your withholding. You generally want to make 00:10:51.659 --> 00:10:53.419 sure your payments cover the lowest of three 00:10:53.419 --> 00:10:55.159 different thresholds. OK, let's lay them out. 00:10:55.220 --> 00:10:58.799 What's threshold one? Threshold one is 100 percent 00:10:58.799 --> 00:11:01.799 of your tax from the prior year. So if you owed 00:11:01.799 --> 00:11:04.559 10 ,000 in tax last year. You have to have paid 00:11:04.559 --> 00:11:06.799 at least $10 ,000 this year to avoid the penalty. 00:11:07.059 --> 00:11:09.740 Simple enough. Well, there's a catch for high 00:11:09.740 --> 00:11:12.620 income folks. If your adjusted gross income, 00:11:12.759 --> 00:11:16.980 your AGI, was over $150 ,000, that number jumps 00:11:16.980 --> 00:11:20.340 to 110 % of the prior year's tax. So high earners 00:11:20.340 --> 00:11:22.200 have to pay a bit more to be safe. They'd have 00:11:22.200 --> 00:11:25.759 to pay $11 ,000 based on that $10 ,000 liability 00:11:25.759 --> 00:11:28.820 from last year. Exactly. Okay, so threshold two. 00:11:29.470 --> 00:11:32.710 is 90 of your current year's tax liability if 00:11:32.710 --> 00:11:34.830 you think your tax bill this year will be 15 00:11:34.830 --> 00:11:37.629 000 you need to make sure you pay at least 13 00:11:37.629 --> 00:11:40.330 500 throughout the year and what if your income 00:11:40.330 --> 00:11:42.450 changes and that's all too complicated to figure 00:11:42.450 --> 00:11:44.970 out then you have the simple crucial one for 00:11:44.970 --> 00:11:48.629 most regular employees threshold three one thousand 00:11:48.629 --> 00:11:51.649 dollars if the total amount you owe when you 00:11:51.649 --> 00:11:54.730 file is less than a thousand bucks you are generally 00:11:54.730 --> 00:11:57.269 safe from any underpayment penalty so if you 00:11:57.269 --> 00:11:59.529 owe nine hundred fifty dollars You've nailed 00:11:59.529 --> 00:12:02.090 it. You had use of that money all year. No penalty. 00:12:02.769 --> 00:12:06.870 If you owe $1 ,050, you might get a small penalty. 00:12:07.049 --> 00:12:09.429 You might. And that makes the Form W -4 just 00:12:09.429 --> 00:12:11.870 critically important. That's the tool you use 00:12:11.870 --> 00:12:13.889 to aim for that sweet spot. It's the ultimate 00:12:13.889 --> 00:12:16.370 tool, yeah. When you fill it out properly at 00:12:16.370 --> 00:12:17.750 the start of the year and a lot of people just 00:12:17.750 --> 00:12:21.070 never update it, it should withhold roughly the 00:12:21.070 --> 00:12:23.450 right amount of tax to get you close to that 00:12:23.450 --> 00:12:26.659 target. So for the listener who gets a big refund 00:12:26.659 --> 00:12:29.519 every year and is just tired of it, what are 00:12:29.519 --> 00:12:31.580 the actual steps they can take to shrink that 00:12:31.580 --> 00:12:34.360 refund? What's the strategy guide? The main lever 00:12:34.360 --> 00:12:37.240 you can pull is adjusting your withholding. You 00:12:37.240 --> 00:12:40.019 go to your employer, you file a new W -4 form. 00:12:40.279 --> 00:12:42.919 This is especially important if your financial 00:12:42.919 --> 00:12:45.480 life is pretty stable year to year and you're 00:12:45.480 --> 00:12:47.759 always getting a huge refund. You can tell your 00:12:47.759 --> 00:12:50.120 employer to withhold a little less. And we always 00:12:50.120 --> 00:12:52.100 focus on the federal side. What are the state? 00:12:52.440 --> 00:12:54.659 That's a great point. State withholding is totally 00:12:54.659 --> 00:12:57.379 separate. If you live in a state with income 00:12:57.379 --> 00:13:00.320 tax, you should check with your state's tax authority 00:13:00.320 --> 00:13:03.179 for their version of the W -4. You can adjust 00:13:03.179 --> 00:13:05.480 that, too, to maximize your monthly take -home 00:13:05.480 --> 00:13:08.120 pay. Okay, so adjusting the W -4 is number one. 00:13:08.299 --> 00:13:10.990 What else can we do? You should really keep an 00:13:10.990 --> 00:13:13.929 eye on the tax rates and the AGI thresholds. 00:13:13.929 --> 00:13:17.230 This is key if your income is hovering near the 00:13:17.230 --> 00:13:19.309 edge of a tax bracket or near a point where you 00:13:19.309 --> 00:13:21.809 might lose out on certain tax credits. If you 00:13:21.809 --> 00:13:24.250 know where you stand, you can project your liability 00:13:24.250 --> 00:13:26.789 and adjust things before the year is over. And 00:13:26.789 --> 00:13:28.750 then, of course, there are deductions. Always. 00:13:29.529 --> 00:13:32.009 Specifically, our source material points to the 00:13:32.009 --> 00:13:34.750 medical expense deduction. This lets you deduct 00:13:34.750 --> 00:13:37.549 qualified medical costs that are over a certain 00:13:37.549 --> 00:13:40.710 percentage of your AGI. This is an area where 00:13:40.710 --> 00:13:42.649 people often over withhold because you can't 00:13:42.649 --> 00:13:44.870 really plan for a major medical event that might 00:13:44.870 --> 00:13:47.129 create a huge deduction for you. And finally, 00:13:47.129 --> 00:13:50.230 a strategy that kind of does double duty savings. 00:13:51.699 --> 00:13:53.840 Absolutely. Maxing out your tax -free retirement 00:13:53.840 --> 00:13:57.039 savings like in a 401k or a traditional IRA. 00:13:57.659 --> 00:14:00.500 Every dollar you put in there lowers your taxable 00:14:00.500 --> 00:14:03.340 income, which lowers your tax bill and reduces 00:14:03.340 --> 00:14:05.500 the chance you'll overpay and get a big refund. 00:14:05.759 --> 00:14:08.320 It's a win -win. Okay, that's a great guide for 00:14:08.320 --> 00:14:10.240 controlling the money going in. Now let's talk 00:14:10.240 --> 00:14:12.340 about the money coming out. How do you actually 00:14:12.340 --> 00:14:15.039 get the refund and how fast can you get it? In 00:14:15.039 --> 00:14:17.519 the U .S., you've got three main options. The 00:14:17.519 --> 00:14:20.120 fastest is direct deposit. You can still get 00:14:20.120 --> 00:14:22.759 a paper check mailed to you. Or you can just 00:14:22.759 --> 00:14:24.620 have the refund applied to your tax liability 00:14:24.620 --> 00:14:26.740 for the following year. Kind of like prepaying 00:14:26.740 --> 00:14:28.899 for next year. Exactly. Another form of forced 00:14:28.899 --> 00:14:31.879 savings. The direct deposit option seems to be 00:14:31.879 --> 00:14:34.659 what most people do. And I saw something fascinating 00:14:34.659 --> 00:14:36.639 in the source material about a change they made 00:14:36.639 --> 00:14:39.320 back in 2006. Oh, the split refund. That's a 00:14:39.320 --> 00:14:41.340 great behavioral finance tool. Yeah. Yeah, since 00:14:41.340 --> 00:14:43.759 2006, you've been able to split your direct deposit 00:14:43.759 --> 00:14:46.879 refund into as many as three different bank accounts. 00:14:47.039 --> 00:14:49.299 Why three? What's the logic there? It was a way 00:14:49.299 --> 00:14:51.870 to encourage people to save. Instead of getting 00:14:51.870 --> 00:14:54.149 one big chunk of cash in your checking account 00:14:54.149 --> 00:14:56.830 and feeling tempted to spend it all, you could 00:14:56.830 --> 00:14:59.090 automatically route portions of it. You could 00:14:59.090 --> 00:15:02.129 send some to savings, some to an investment account, 00:15:02.289 --> 00:15:05.330 and keep some for spending. It's a really smart 00:15:05.330 --> 00:15:07.929 nudge. And in terms of speed, we've come a long 00:15:07.929 --> 00:15:10.690 way. I feel like in the 90s it took forever to 00:15:10.690 --> 00:15:13.470 get a refund. It could take up to 12 weeks, yeah. 00:15:14.240 --> 00:15:16.879 Now, thanks to e -filing, things are much faster. 00:15:17.080 --> 00:15:19.659 The average for a paper return is about six weeks. 00:15:19.820 --> 00:15:21.759 But if you file electronically, you're typically 00:15:21.759 --> 00:15:24.059 looking at around three weeks. But what if you 00:15:24.059 --> 00:15:26.830 need that money even faster? This is where we 00:15:26.830 --> 00:15:28.850 have to issue a pretty serious warning about 00:15:28.850 --> 00:15:32.629 things like refund anticipation loans or RALs. 00:15:32.629 --> 00:15:35.509 Oh, yeah. These are incredibly dangerous financial 00:15:35.509 --> 00:15:37.610 products. They promise to get you your refund 00:15:37.610 --> 00:15:40.629 in a day or two, but the fees and interest rates 00:15:40.629 --> 00:15:44.690 are just, they're astronomical. The source warns 00:15:44.690 --> 00:15:46.570 that the effective annual interest rate can be 00:15:46.570 --> 00:15:51.690 over 200%. 200%. It's predatory. You end up giving 00:15:51.690 --> 00:15:54.250 away a huge chunk of your own refund just to 00:15:54.250 --> 00:15:56.250 get it a couple of weeks earlier. It's almost 00:15:56.250 --> 00:15:59.149 never worth it. OK, so before we go global, one 00:15:59.149 --> 00:16:02.009 last point on the U .S. system. How does the 00:16:02.009 --> 00:16:05.149 government make sure everyone gets paid, even 00:16:05.149 --> 00:16:06.889 people who don't have a traditional bank account? 00:16:07.440 --> 00:16:09.700 That's a really important financial inclusion 00:16:09.700 --> 00:16:13.399 point. So back in 1996, a law was passed requiring 00:16:13.399 --> 00:16:15.720 the government to make most payments electronically. 00:16:16.179 --> 00:16:19.399 To handle the unbanked population, the Treasury 00:16:19.399 --> 00:16:21.860 Department partnered with a bank to create the 00:16:21.860 --> 00:16:24.639 Direct Express Debit MasterCard. It's a prepaid 00:16:24.639 --> 00:16:26.519 debit card. It's a prepaid debit card. And a 00:16:26.519 --> 00:16:28.940 lot of states now use similar cards to issue 00:16:28.940 --> 00:16:31.220 tax refunds to people without bank accounts. 00:16:31.419 --> 00:16:33.860 It ensures that not having a bank doesn't stop 00:16:33.860 --> 00:16:35.700 you from getting your money back. That's a critical 00:16:35.700 --> 00:16:38.019 piece of infrastructure. let's go global now 00:16:38.019 --> 00:16:40.519 because the U .S. system, for all its flaws, 00:16:40.779 --> 00:16:42.460 is pretty centralized. It's kind of automatic. 00:16:42.759 --> 00:16:45.039 That is definitely not the case everywhere else. 00:16:45.179 --> 00:16:47.080 No, not at all. When you look around the world, 00:16:47.120 --> 00:16:49.340 you see a lot of countries, New Zealand, the 00:16:49.340 --> 00:16:52.279 U .K., Ireland, Canada, they all use what's called 00:16:52.279 --> 00:16:54.620 a payee system, pay as you earn. Which is similar 00:16:54.620 --> 00:16:56.620 to U .S. withholding, where the employer takes 00:16:56.620 --> 00:17:00.740 the tax out. It's very similar. But the process 00:17:00.740 --> 00:17:03.039 for actually getting a refund if you've overpaid 00:17:03.039 --> 00:17:06.130 is wildly different. And in a lot of these places, 00:17:06.230 --> 00:17:09.089 the burden is really on you, the earner, to go 00:17:09.089 --> 00:17:11.849 and actively claim your money. Okay, so that 00:17:11.849 --> 00:17:14.390 immediately fits the dynamic. In the U .S., you 00:17:14.390 --> 00:17:16.509 just file and expect the money. Let's start with 00:17:16.509 --> 00:17:18.950 New Zealand. You say they have a system that 00:17:18.950 --> 00:17:21.609 requires you to be very proactive and that it 00:17:21.609 --> 00:17:24.029 actually creates a kind of risk. New Zealand 00:17:24.029 --> 00:17:26.309 is the perfect example of a proactive system. 00:17:26.549 --> 00:17:30.369 The employer deducts tax via PYE. The Inland 00:17:30.369 --> 00:17:32.670 Revenue Department, or IRD, has all the info. 00:17:33.029 --> 00:17:35.960 But... And this is the key. The IRD does not 00:17:35.960 --> 00:17:38.000 automatically process your refund. So if you 00:17:38.000 --> 00:17:39.859 do nothing, the money just sits there. It just 00:17:39.859 --> 00:17:42.039 sits there. You have to actively request and 00:17:42.039 --> 00:17:43.900 file what's called a personal tax summary, a 00:17:43.900 --> 00:17:47.299 PTS, to even start the process. Wow. But here's 00:17:47.299 --> 00:17:49.019 the risk factor. And this is why you have to 00:17:49.019 --> 00:17:51.599 be so careful. If you request a PTS, but it turns 00:17:51.599 --> 00:17:53.759 out you actually underpaid your tax. Oh, no. 00:17:53.940 --> 00:17:56.740 A debt is created instantly. The moment you file 00:17:56.740 --> 00:17:58.779 that form, you officially owe the government 00:17:58.779 --> 00:18:01.549 money. That is a huge deterrent. You have to 00:18:01.549 --> 00:18:03.690 be really, really sure you're owed money before 00:18:03.690 --> 00:18:06.430 you make that claim. I can see why a whole industry 00:18:06.430 --> 00:18:08.670 of third -party helpers would pop up there. Exactly. 00:18:09.009 --> 00:18:11.170 That's why they have tax agents. They're mostly 00:18:11.170 --> 00:18:13.470 self -regulating, and their whole job is to help 00:18:13.470 --> 00:18:16.750 you figure out if filing a PTS is a good idea. 00:18:17.589 --> 00:18:20.049 An entire industry has sprung up just because 00:18:20.049 --> 00:18:21.990 the burden of calculation is on the taxpayer. 00:18:22.630 --> 00:18:24.690 Okay, so let's cross over to the United Kingdom. 00:18:24.869 --> 00:18:28.390 They also use pay IE through HMRC. What's the 00:18:28.390 --> 00:18:32.220 story there? Is it more about... Specific Complex 00:18:32.220 --> 00:18:35.680 Claims That's right. The UK system has some automatic 00:18:35.680 --> 00:18:38.640 processes. Like if you have a simple refund due 00:18:38.640 --> 00:18:41.019 because your tax code changed, they'll often 00:18:41.019 --> 00:18:43.460 just send you a P -800 form and process it. You 00:18:43.460 --> 00:18:45.339 don't have to chase that. And you can also claim 00:18:45.339 --> 00:18:47.559 if your circumstances change, like you get a 00:18:47.559 --> 00:18:50.279 second job or something. Yes. But the real deep 00:18:50.279 --> 00:18:52.779 dive nugget, the big opportunity in the UK, is 00:18:52.779 --> 00:18:55.539 in making claims for specific work -related expenses. 00:18:56.000 --> 00:18:57.940 And this is a huge deal because you can make 00:18:57.940 --> 00:19:00.579 these claims for up to the last four tax years. 00:19:00.680 --> 00:19:03.680 A four -year look -back window. That's a major 00:19:03.680 --> 00:19:05.539 opportunity. What kind of jobs are we talking 00:19:05.539 --> 00:19:08.140 about? The source material calls out people working 00:19:08.140 --> 00:19:12.900 for the Ministry of Defense, the MOD, or subcontractors 00:19:12.900 --> 00:19:14.900 in the construction industry scheme, the CIS. 00:19:15.400 --> 00:19:17.980 These people often have costs that are fully 00:19:17.980 --> 00:19:20.700 reimbursable through the tax system, but only 00:19:20.700 --> 00:19:23.160 if they actively claim them. So give us some 00:19:23.160 --> 00:19:25.299 real -world examples. What kind of expenses are 00:19:25.299 --> 00:19:28.950 these? Okay, so for an offshore worker or someone 00:19:28.950 --> 00:19:30.829 in the military, it could be the cost of temporary 00:19:30.829 --> 00:19:33.130 accommodation when you're working away from your 00:19:33.130 --> 00:19:36.450 home base or the cost of food while you're traveling 00:19:36.450 --> 00:19:39.869 between different sites. For an extraction subcontractor, 00:19:39.869 --> 00:19:42.309 it could be buying or hiring specialist tools, 00:19:42.549 --> 00:19:45.230 mileage for driving to different job sites, even 00:19:45.230 --> 00:19:47.930 replacing essential equipment. So you can retroactively 00:19:47.930 --> 00:19:50.470 lower your PACS bill based on these legitimate 00:19:50.470 --> 00:19:53.049 business costs. And get a substantial refund 00:19:53.049 --> 00:19:54.609 that you would have otherwise just missed out 00:19:54.609 --> 00:19:57.440 on. This is a key difference. In the U .S., a 00:19:57.440 --> 00:19:59.140 lot of those itemized deductions got limited. 00:19:59.359 --> 00:20:01.819 In the U .K., these specialized work expenses 00:20:01.819 --> 00:20:04.279 are still a huge way to get money back. Okay, 00:20:04.319 --> 00:20:07.339 so now on to Ireland, also a PA system. What's 00:20:07.339 --> 00:20:09.619 the key takeaway there? Ireland is similar. It's 00:20:09.619 --> 00:20:12.450 a claim -driven model. The most critical piece 00:20:12.450 --> 00:20:14.869 of information here is the time limit. You have 00:20:14.869 --> 00:20:17.369 to claim your refund within four years of the 00:20:17.369 --> 00:20:19.450 end of the tax year. Four years seems to be a 00:20:19.450 --> 00:20:21.990 common theme. It is. If you miss that window, 00:20:22.130 --> 00:20:24.630 the money is just gone. It's forfeited to the 00:20:24.630 --> 00:20:26.990 government permanently. So you have to be timely. 00:20:27.150 --> 00:20:29.630 Right. Now let's head over to Canada, which is 00:20:29.630 --> 00:20:32.150 also P -Y -E. But they have a feature that just 00:20:32.150 --> 00:20:34.750 completely changes that interest -free loan debate 00:20:34.750 --> 00:20:38.220 we started with. Yes, the Canadian system. run 00:20:38.220 --> 00:20:41.160 by the Canada Revenue Agency, or CRA, it totally 00:20:41.160 --> 00:20:44.099 flips the script. The CRA actually pays you interest 00:20:44.099 --> 00:20:46.740 if they're late sending you your refund. Wow. 00:20:47.039 --> 00:20:49.039 Okay, so that completely removes the financial 00:20:49.039 --> 00:20:51.319 argument against overpaying, as long as they're 00:20:51.319 --> 00:20:53.759 slow. But why do Canadians overpay in the first 00:20:53.759 --> 00:20:56.240 place? It's similar reasons. Maybe a self -employed 00:20:56.240 --> 00:20:59.119 person's income drops unexpectedly, or someone 00:20:59.119 --> 00:21:01.960 just forgot a deduction on their TD1 form, which 00:21:01.960 --> 00:21:04.460 is their version of the W -4. How fast are they? 00:21:04.640 --> 00:21:07.440 They're pretty quick. If you e -file by the April 00:21:07.440 --> 00:21:10.059 30th deadline, you can get your refund in about 00:21:10.059 --> 00:21:12.859 two weeks. Paper filers wait about eight weeks. 00:21:13.200 --> 00:21:15.480 That two -week turnaround is really efficient. 00:21:15.779 --> 00:21:18.619 It is. But if they're not on time, the interest 00:21:18.619 --> 00:21:22.730 kicks in. The CRA pays compounded daily interest 00:21:22.730 --> 00:21:25.170 on delayed refunds. Compounded daily? And that 00:21:25.170 --> 00:21:27.650 interest starts clocking up on the later of two 00:21:27.650 --> 00:21:32.210 dates, either May 31st or 31 days after you actually 00:21:32.210 --> 00:21:34.849 file your return. So if they're slow, you actually 00:21:34.849 --> 00:21:36.930 get paid for the delay. That almost makes it 00:21:36.930 --> 00:21:39.230 okay to overpay, knowing you might get a little 00:21:39.230 --> 00:21:41.509 bonus if the government drags its feet. It definitely 00:21:41.509 --> 00:21:43.490 changes the calculation. It softens the blow 00:21:43.490 --> 00:21:45.890 of that opportunity cost we talked about. And 00:21:45.890 --> 00:21:48.369 I assume, like other governments, the CRA can 00:21:48.369 --> 00:21:50.009 still hold onto your money. your refund if you 00:21:50.009 --> 00:21:52.369 owe them money for something else. Oh, absolutely. 00:21:52.609 --> 00:21:54.710 They are very good at offsetting. If you have 00:21:54.710 --> 00:21:56.769 an outstanding tax balance or a student loan 00:21:56.769 --> 00:21:58.869 debt or some other government debt, they will 00:21:58.869 --> 00:22:00.990 keep your refund to settle that first. That's 00:22:00.990 --> 00:22:03.569 a pretty standard practice globally. OK, finally, 00:22:03.670 --> 00:22:06.809 let's look at India. The source material highlights 00:22:06.809 --> 00:22:09.450 a really interesting legal flexibility they have, 00:22:09.549 --> 00:22:12.450 which seems to focus more on compassion. That's 00:22:12.450 --> 00:22:14.849 a great way to put it. So India also provides 00:22:14.849 --> 00:22:17.589 for refunds of excess tax and they pay interest 00:22:17.589 --> 00:22:20.930 on it, similar to Canada. But the key legal feature 00:22:20.930 --> 00:22:23.950 is about timing and hardship. While you're supposed 00:22:23.950 --> 00:22:26.309 to file within a certain period, the law has 00:22:26.309 --> 00:22:28.789 this crucial exception built into it. An exception 00:22:28.789 --> 00:22:32.160 for what? Under their Income Tax Act, the commissioner 00:22:32.160 --> 00:22:34.819 of income tax has the power to condone a delay 00:22:34.819 --> 00:22:37.400 in claiming a refund. Condone a delay. Yeah, 00:22:37.500 --> 00:22:39.920 to basically forgive the lateness. They can do 00:22:39.920 --> 00:22:42.420 this if forcing the person to stick to the deadline 00:22:42.420 --> 00:22:45.319 would cause them genuine hardship. So, for example, 00:22:45.319 --> 00:22:47.079 if you miss the deadline because of a severe 00:22:47.079 --> 00:22:49.680 family crisis or a medical emergency. So the 00:22:49.680 --> 00:22:51.940 legal system itself has a built -in safety net. 00:22:52.279 --> 00:22:54.980 It's designed to be flexible and prevent someone 00:22:54.980 --> 00:22:57.720 from losing vital money just because of circumstances 00:22:57.720 --> 00:23:00.259 beyond their control. It's a powerful feature, 00:23:00.480 --> 00:23:03.740 really aimed at economic justice. It's a recognition 00:23:03.740 --> 00:23:06.079 that strict rules can sometimes conflict with 00:23:06.079 --> 00:23:08.839 real life. And it shows a strong legal philosophy 00:23:08.839 --> 00:23:11.680 that the government shouldn't be unjustly enriched 00:23:11.680 --> 00:23:14.339 by a citizen's misfortune. That's a fantastic 00:23:14.339 --> 00:23:17.019 global tour. I mean, we've seen everything from 00:23:17.019 --> 00:23:20.539 the very centralized, almost autopilot U .S. 00:23:20.539 --> 00:23:23.200 system to the totally proactive system in New 00:23:23.200 --> 00:23:25.680 Zealand, the expense claim opportunities in the 00:23:25.680 --> 00:23:29.000 U .K. and these interest bearing, legally flexible 00:23:29.000 --> 00:23:32.359 systems in Canada and India. It's definitely 00:23:32.359 --> 00:23:34.460 not a one size fits all world when it comes to 00:23:34.460 --> 00:23:36.799 tax refunds. Not at all. And if we synthesize 00:23:36.799 --> 00:23:38.619 this for the listener, the biggest single difference 00:23:38.619 --> 00:23:41.119 is just the administrative expectation. In the 00:23:41.119 --> 00:23:43.160 U .S., the system tries to be automatic. which 00:23:43.160 --> 00:23:45.539 leads to that massive, you know, almost $200 00:23:45.539 --> 00:23:48.160 billion payout. It all hinges on getting that 00:23:48.160 --> 00:23:51.039 W -4 right. But in a lot of these other pay -wide 00:23:51.039 --> 00:23:53.000 systems like New Zealand, the responsibility 00:23:53.000 --> 00:23:55.240 shifts entirely to you. You have to be the one 00:23:55.240 --> 00:23:57.500 to proactively go and claim what's yours, often 00:23:57.500 --> 00:24:00.420 by filing a specific form or keeping detailed 00:24:00.420 --> 00:24:02.839 records of your expenses. And that has a huge 00:24:02.839 --> 00:24:05.220 impact on everything else. We saw the incredible 00:24:05.220 --> 00:24:08.619 two -week speed of a Canadian e -file, the clever 00:24:08.619 --> 00:24:10.420 U .S. system that lets you split your deposit 00:24:10.420 --> 00:24:13.359 three ways, and the use of prepaid debit cards 00:24:13.359 --> 00:24:15.779 to make sure even the unbanked get their money. 00:24:16.000 --> 00:24:18.579 So if we boil it down, there are two main takeaways 00:24:18.579 --> 00:24:21.440 for you, the listener. It really comes down to 00:24:21.440 --> 00:24:25.160 actionable strategy. First, you now know how 00:24:25.160 --> 00:24:28.319 to optimize your W -4. You understand the tradeoff. 00:24:28.579 --> 00:24:32.410 You can aim to owe. just under that penalty threshold, 00:24:32.529 --> 00:24:35.809 that $1 ,000 mark for most people, to avoid giving 00:24:35.809 --> 00:24:38.009 the government that interest -free loan. And 00:24:38.009 --> 00:24:40.650 second, you recognize the power of filing to 00:24:40.650 --> 00:24:42.690 claim what you're entitled to, whether that's 00:24:42.690 --> 00:24:44.789 the EITC in the U .S., which you only get if 00:24:44.789 --> 00:24:47.109 you file, or those work -related expenses in 00:24:47.109 --> 00:24:49.369 the U .K., or just filing the PTS in New Zealand. 00:24:49.529 --> 00:24:51.730 These things aren't always automatic. You have 00:24:51.730 --> 00:24:54.250 to actively go and claim them. It really all 00:24:54.250 --> 00:24:55.990 comes down to a personal choice, doesn't it? 00:24:56.049 --> 00:24:59.369 It's liquidity versus security. Maximizing your 00:24:59.369 --> 00:25:01.829 money versus minimizing your stress. Absolutely. 00:25:02.089 --> 00:25:04.650 And I think the final provocative thought we 00:25:04.650 --> 00:25:06.569 can leave you with is really digging into that 00:25:06.569 --> 00:25:09.490 choice of strategy. Do you take the mathematically 00:25:09.490 --> 00:25:13.470 optimized route? You aim for that perfect small 00:25:13.470 --> 00:25:15.430 amount owed, which gives you more cash in your 00:25:15.430 --> 00:25:18.069 pocket every month to save or invest. Or do you 00:25:18.069 --> 00:25:20.289 take the psychological route? You consciously 00:25:20.289 --> 00:25:23.049 use the government as a forced interest -free 00:25:23.049 --> 00:25:25.750 savings account because you value the security 00:25:25.750 --> 00:25:28.130 of that guaranteed lump sum payment every spring. 00:25:28.329 --> 00:25:30.049 And the math is different depending on where 00:25:30.049 --> 00:25:33.150 you live. In the U .S., that lump sum is a voluntary 00:25:33.150 --> 00:25:35.970 zero -interest loan you're giving. But in a place 00:25:35.970 --> 00:25:38.250 like Canada, where the government pays you compounded 00:25:38.250 --> 00:25:41.029 daily interest if they're late, Well, that changes 00:25:41.029 --> 00:25:43.450 the whole equation. So which approach is truly 00:25:43.450 --> 00:25:45.829 better for your financial peace of mind? The 00:25:45.829 --> 00:25:47.750 one that's mathematically sound or the one that 00:25:47.750 --> 00:25:50.549 feels emotionally secure? That's the core question 00:25:50.549 --> 00:25:53.329 to mull over after this deep dive. And the answer 00:25:53.329 --> 00:25:54.910 is going to be different for every single person.