Every year, as we get close to the income tax deadline, I hear financial experts complaining about how terrible getting tax refunds can be.
If you’re like me, you look forward to tax refunds each year from not only Uncle Sam but also from your state’s treasury. (That’s assuming your state also has its own income tax. South Carolina does!)
And every year, as tax deadline day approaches, I hear the financial gurus on the morning news programs warning against having your employer take too much money. Jill Schlesinger, who hosts Jill on Money and is also a correspondent for CBS News, is one of those people.
WBUR recently quoted her on the subject:
You essentially are getting your own money back after the government holding it for a year. And yet you got paid no interest for this. So I think of a refund as this lousy deal, essentially an interest-free loan to the government.
Jill Schlesinger
A recent article from Kiplinger echoes the sentiment:
Many people rejoice each year when they receive their tax refund, but high refund amounts could mean that you overpaid your taxes throughout the year. And if that’s the case, you’ve essentially lent the government money, completely interest-free.
Kiplinger magazine
Count me among the “rejoicers” each year.
The ‘tax refunds are interest-free loans’ thing doesn’t concern me at all
I worked for a company many years ago that gave its employees a Christmas bonus. We received a paycheck twice each month, which translated to 24 checks. But at the company Christmas party every December, we would receive our bonus check. That check, it turned out, was the same as a regular two-week paycheck.
The only real difference was that certain deductions did not get taken from that bonus.
But when you did the math, looking at your annual salary and dividing by 24, something didn’t add up. Then someone realized that when you divided your annual salary by 25, it all made sense. That “Christmas bonus” was actually part of our salary. The payroll department divided our annual salary by 25.
So the “bonus” wasn’t really a bonus at all.
It made some people angry. Frankly, I liked it. Every December, when it was time to worry about Christmas gifts and holiday spending and sticking to a budget, that “bonus” came right on time to help.
Yes, they could have divided the annual salary by 24 and just paid us what they owed us every two weeks. But with that extra check, it was big enough (comparatively speaking) that we’d feel more of a motivation to pay off a big bill. Had we taken that “bonus” check and divided it by 24, then added that amount to each biweekly check, we’d have spent the smaller additions each month without even thinking about it.
I told people it was like having a Christmas Club account at the bank. That’s how I view tax refunds.
The advantage of tax refunds
So yes, looking from the standpoint of the “interest-free loan” perspective the financial gurus employ, I can see how you could perceive it as a disadvantage.
On the other hand, I paid off a credit card with my tax refund this year. In fact, in most years, I put that money toward covering — and paying off — a bill.
The real question the financial gurus like to ask at this point is predictable: Couldn’t you use the same discipline to pay off the credit card bill (or whatever other kind of bill it is) over the course of the year?
Well, of course. Yes, I could have done so. The problem is, life happens. Sometimes, unexpected expenses come up. By having that extra “payday” in the form of the tax refund, you can alleviate those unexpected expenses faster. That gets debt off your books. That helps your credit score. Overall, getting out of debt that much faster helps your overall financial picture.
So do I mind giving Uncle Sam a tax-free loan over the course of the year? Honestly, I don’t. And given how much our federal lawmakers have overspent every year, Uncle Sam carries a much worse financial health score than I do. Maybe he needs a little break once in a while.
I know I benefit from getting a tax refund. I make the most of that check to help myself get out of debt faster.
If you don’t like the idea of paying a little more than you have to during the year to get more back early into the next year, by all means, don’t. I guess we just look at things a little differently.
