Financial Experts Discourage Trying for a Tax Refund
A recent report about income tax returns included comments about why people shouldn’t set themselves up to receive a tax refund each year.
The Washington Post recently reported that many people were upset about a smaller tax refund than in years past. The change is the result of a combination of two things: the GOP tax cut passed last year and a revision to the federal withholding tables.
The combination means that people who used to have a higher refund aren’t getting as much back this year. Actually, they’ve mostly gotten more back each payday all year long.
For years, I’ve heard the argument — it’s repeated in the story — that if you get a refund, you essentially gave the government an interest-free loan by virtue of overpaying on your taxes all year.
But I couldn’t help notice a quote in the story from a senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute :
“It’s a mystery why taxpayers seem to be comfortable — and even happy — with getting refund checks.”
There’s no mystery at all.
Really, it’s perfectly simple to figure out.
Suppose you normally get a $1,000 tax refund each year.
What would happen if you didn’t get the refund? If you get paid every week, you’d get that extra $1,000 spread out over 52 checks. That means each week, you’d get an additional $19.23.
What would you do with that money?
Well, the wise thing to do would shift that amount each week into a savings account so that at the end of the year, you’d have that $1,000 in the bank. But honestly, how many people are going to remember to shift over that much money to a savings account each year?
And beyond that, as things come up during the year, it’ll be easier to justify spending a portion of that money for emergencies during the year.
If you get a tax refund, yes, you’ve given the government a tax-free loan for 12 months. But a couple of months into the new year, you’re suddenly going to get that $1,000 check that you can do with as you please.
You can make a big savings account deposit. Or, as I do, you can pay off a bill once and for all. You haven’t spent the money a little along as many people might have: you have, essentially, a Christmas club-style bonus that just comes a couple of months after Christmas. (Speaking of Christmas, that tax refund check might help you pay off whatever’s left of your Christmas shopping bills!)
I’d never delude myself into thinking that the government was giving me something extra. I understand that they’re taking a little more than they should. I’m the one who had to ask them to do so, after all.
But when the tax refund comes, I know I’ve simply found an alternate way to save a little extra money that I can then put to something I need…or maybe even something I don’t really need.
That shouldn’t be much of a mystery in my book.