Many of you will be receiving your Economic Impact Payment from the American Rescue Plan Act of 2021. My first thought was “I wonder if they have a staff whose sole purpose is to come up with these names… sort of like the team of writers who write for the late night shows?” My second, more pertinent, thought was “I wonder what people did with their checks last year?“
I listen to a bazillion webinars over the course of a year and I remember one economic talking head who put up a chart that showed how healthy the economy was since the majority of people who received checks put it into savings and would, therefore, be spending those dollars shortly (which I thought curious at the time since savings is savings not spending but I was group muted so I kept that to myself). The reality is that more than half of the people who received payments last year used them to pay off debt and 15% spent them. The last time I checked 51% + 15% represents a majority so, apparently, I need to find a new talking head who can actually do math.
Digging a little deeper, the number one debt that was cleared with those checks was cellphone bills, followed by utilities and cable TV, which is an interesting commentary on our priorities here in the First World. Spending was on apparel (something I can totally concur with, having worn basically the same wardrobe for over a year now—I’m an in-store shopper who never really adapted to buying clothes online, which I’m sure surprises none of you) then video games and sporting goods, with Walmart, Costco, and Target reaping the rewards. While we’ve put some people back to work, we still have a real unemployment rate of 6.2%—relatively unchanged from January but down significantly from last year’s high of 14.2%—and that’s a lot of people wondering how to keep a roof over their heads and food on the table (and apparently, how to make sure they can watch The Bachelor). So, how will you spend your check?
This week also brought a gift of another colour with the IRS pushing the tax filing deadline out again this year to May 17th. Not as far out as last year but a little extra time if someone wants it. Ironically, this is a whole lot less about the IRS being concerned for all of the taxpayers out there and a whole lot more about them being totally behind the ball handling of last year’s tax returns and struggling to incorporate some of the retroactive changes included in the American Rescue Plan Act of 2021 (which means the Senate has a staff of joke writers but apparently no phone to tell the head of the IRS about what they’re about to do…).
To put some of this in context, even now, the IRS has a backlog of approximately two million pieces, roughly one-half of which are unopened hard copy returns. While that is down from five million in January, which was down from 11 million in March 2020, they are still receiving between 300,000 to 500,000 new pieces every week. That backlog isn’t going away anytime soon now that we are well into filing season. This only confirms my number one rule of thumb with the IRS: Their bark is worse than their bite and their first letter is simply a first date, not the wedding.
Regardless of when you file your return, this is always a good time to evaluate how we handle our tax payments. If you owed taxes, the first thing to do confirm you didn’t pay a penalty for underpayment. Paying a tax bill when you file is a personal choice; paying a penalty for underpayment is just silliness.
Not a fan of writing a check? Now’s the time to look at your withholdings and adjust them so you don’t have to write a check next year. On the flip side, there’s nothing wrong with receiving a refund as long as there is a strategy behind it. The old school of thought was to avoid a big refund since you were letting the government “use” your money which is, well, old school. Unless you are banking somewhere offshore with your cousin in a cartel, you aren’t getting much in your savings account and neither is the government.
Think of your taxes as a cash flow item—if you have trouble saving for the long-term, over-withhold and use your refund to save into your retirement account for next year. You can have your refund direct deposited into a variety of different types of accounts, including IRAs. I’ve had people over-withhold for vacations, upcoming tuition bills, and new furnaces.
Like everything else we talk about in my weekly blogs, the IRS is just another tool in our tool belt—a well-funded tool not deserving of their perceived tough-guy reputation but rather a tool we can use to our benefit.