RSS Feeds
Facebook
GRS Twitter
Kris and I received $2789 in tax refunds this year.
Already I can hear the sound of hundreds of heads thumping against hundreds of desks. Many of you are wailing, “Why?! Why?! Why?!” Of all the financial choices a person can make, getting a large refund is universally considered one of the dumbest. Magazines advise against it. Books advise against it. Blogs advise against it. Yet every year, millions of Americans like me use their tax refund as a sort of forced savings account.
Why do we do it?
The arguments against a big refund
First, let’s examine the reasons a person shouldn’t get a big tax refund.
- “You’re giving an interest-free loan to the government!” The implication is that this is a stupid idea. My response is generally, “So what?” I don’t mind giving an interest-free loan to the government. I view it as a form of short-term charity. It doesn’t bother me.
- “You’re cheating yourself of cash-flow!” If you receive a refund, you’ve had extra money withheld from each paycheck. In my case, I’m having more than $100/month extra withheld. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not. There’s merit to this argument, but it doesn’t apply to me. I’m not that pinched.
- “That money could be invested at a high rate of return!” This argument I grant to be convincing, and I don’t have a rebuttal. Not only does a tax refund give your money to the government interest-free, it also deprives you of the chance to earn a return on the money.
If there are clear reasons not to get a tax refund, then why do it?
The argument for a big tax refund
I suspect that everyone who chooses to get a big tax refund does so for the same reason. It’s a psychological trick. I like the lump-sum windfall.
In the past, I was a poor money manager. There was no way I could have saved an extra $50 per paycheck. I would have spent it. But by electing to receive a large refund, I imposed a forced savings plan on myself. Over the years, this enabled me to:
- Purchase a brand-new Bianchi Volpe touring bicycle
- Purchase a refurbished Macintosh G5 tower
- Save money for a cruise to Alaska
Not all of my refund-based purchases were smart. Last year I spent all the money on comic books. That was dumb. Here are all the things I’ve done with this year’s refund:
- I spent $150 on comic books (my only comic book splurge so far this year)
- I spent $90 on lectures from The Teaching Company
- I put some into savings for our vacation this summer
- I used some to pay for continued work with my wellness coach
- And I used $1000 to pay off debt
I consider this a fine balance, a perfect use of a small windfall.
Why I won’t pursue a tax refund in the future
Having said this, this is probably my last big refund. At this point in my life, based on what I know about money, a tax refund is a poor choice. I have developed enough self-discipline to use my money wisely, even when it comes in small chunks.
But I’m not going to argue that you shouldn’t get a refund. Do what works for you. If a large refund makes you happy, by all means do it. If it helps you to save, then do it. However, as with the debt snowball, realize that you are paying a mathematical penalty for doing so.
(Rich at Queercents loves his tax refund, too.)
This article is about Choices, Real-Life, Taxes Tuesday, 13th March 2007 (by J.D. Roth)
March 13th, 2007 at 5:13 am
I totally agree with you on this one. No matter how in control I think I am of my money, it just never seems to accumulate in my bank account. I can hear slow leak of money from my account like the hiss of air from a balloon. By opting for a large refund, I’ll actually have some cash and get something to show for it.
I’m already saving quite a bit (much more than any other 22 year old that I know), so I don’t feel at all guilty about blowing my refund on something frivolous either. There are better things to do with the money, but this way I don’t have to worry about my self control (or lack there of).
March 13th, 2007 at 5:31 am
I also totally agree. I’d rather have too much tax withdrawn from my paycheck and know that I’m going to get a refund than to worry that I won’t have enough to pay my taxes in April.
For the past four years I’ve been getting enormous refunds ($20K or more) because of a weird and unavoidable geographical glitch that’s too esoteric and complicated to explain here, but those windfalls have done wonders for me financially and I don’t think I ever would have saved as much on my own.
March 13th, 2007 at 5:45 am
Nina at Sitting Pretty had a post last year about getting a refund. Yeah, we all know it’s mathematically a bad idea, but if it psychologically feels good, there’s financial wisdom in it. Satisfaction is important since it’s so easy to be unfulfilled by doing things in small dribs and drabs.
As for me, I dread my taxes right now. I have no idea if I am going to owe money or get a refund. *sigh* gotta find the time to do it.
March 13th, 2007 at 5:56 am
I both agree and disagree. For myself, I usually run a total refund of under $100. That’s my goal, I’d rather have my own money, and I don’t need the psychological boost of the huge check in March/April. In fact, when friends are getting excited because their huge refund is coming, and they learn how little mine is, many don’t understand what I’m doing wrong to get back so little. I assume this is true for most people, they don’t really have an understanding that you have control and generally “just put 0 or 1 because that’s what the HR guy said.”
I also agree that there are some people who like/need the forced savings, and anything they can’t spend is safe. The problem is that, in my experience, this is usually coupled with the attitude that the tax refund is like free money and not their own money that they could have had anyway, so it’s just spent frivolously and with no regard. There’s no point in having a forced savings to protect yourself from spending the money during the year if you’re just going to blow it in April anyway.
March 13th, 2007 at 5:58 am
I agree. It may not be the smartest thing, but if it gets a person to save money, then by all means take the refund. It’s all about baby steps, and learning as you go. Congratulations to you for getting to the point of not needing to make a big refund, though.
March 13th, 2007 at 6:15 am
One compromise might be to buy Treasury bills. You are still lending money to the government, but you will earn some interest in return. For a long time, at my father’s advice, I allowed $20 to be taken out of my paycheck each week. Over a year, that’s $520 for me. That’s over half the minimum price you could pay for a 4-week T-bill. Until I have a more specific say in the ways the government spends my money, I can’t view them in the same light as I do a charitable organization.
March 13th, 2007 at 6:17 am
My wife and I also choose to receive a big refund at the end of the year. Like most, it’s a means of forced savings for us, even though it’s not optimum from a strictly financial standpoint.
March 13th, 2007 at 6:30 am
I found myself in the reverse position this year, of owing a little over $1,100 (enough to make me gulp and figure out if there wasn’t an additional penalty). The reasons? Losing one of the few deductions I can claim and lowering my 401(k) contribution.
It should have sent me into a tizzy, but I just wrote a check out of reserves.Now I’m contemplating whether to adjust my withholdings or just save up for next year.
db
March 13th, 2007 at 6:38 am
Until I have a more specific say in the ways the government spends my money, I can’t view them in the same light as I do a charitable organization.
This is a *very* good point. I have to just tell myself that all of my money is going to the programs I’d want to fund. It’s not true, of course — it’s really being split proportionate to the budget — but it’s what I tell myself.
Actually, I’ve always thought this would be an interesting thing for the government to do: allow taxpayers to designate the allocation of their taxes in broad categories. For example, maybe one taxpayer would say: “50% military, 10% schools, 10% social services, 10% highways, 10% administration, 10% space research”. I suspect our budget would end up very similar to our non-war-time budget, but who knows? It’s an impractical idea, I know. I just think it’s fun…
March 13th, 2007 at 6:54 am
I have fallen into the refund splurge trap… well, since just about the first year I started working in high school. Every year, I hear my friends talk about how they’re going to spend their refund. I received a hair over $600 this year, and I put it all towards paying off personal debt and building an emergency fund.
It honestly feels very satisfying to take a giant stride towards achieving my goals because of a large refund. Sure, I could have done it gradually over the past year, but the change wouldn’t have been so immediately visible or psychologically satisfying.
March 13th, 2007 at 7:12 am
I aim to not have a refund at all, and for the last two years I have had to pay (only a couple hundred bucks). I do this because I don’t want to loan the government any money interest-free until I get a say in what they do with it (anyone see Stranger Than Fiction where Maggie Gyllenhall refuses to pay the 27% of her taxes that would support the war or something? I digress).
For people who are such bad savers, there’s no need to use the government to help you save–you can direct portions of your paycheck to be funneled directly into a savings account, money market account, retirement fund or IRA (up to the annual percentage allowed for the IRA). You might even get to do so pre-tax depending on the type of investment. If you automate savings, you’re getting a better return on your money and you don’t need to worry about not being able to control your spending. Why not up your 401k contribution instead of sending your money to Uncle Sam?
March 13th, 2007 at 7:19 am
It is most important that you are doing something that works for you. Otherwise the arguments either for or against the big refund will appear to have little relevance. It seems to be a normal progression for people to go from (1) getting a big refund and spending it all to (2) getting a big refund and saving or paying down debt to (3) reducing withholdings and saving more or paying down debt as you earn it. It’s like going through financial puberty.
Regarding the “interest-free loan to the government,” if you have any debt (mortgages, car loans, credit cards), you are actually subsidizing the government’s interest at your highest debt rate because, by not having the money to pay down that debt, you are effectively borrowing the money for the government to hold.
March 13th, 2007 at 7:28 am
I got a large tax refund this year, but I’ve cranked down the taxes out of my paychecks as much as possible.
Deductions in the form of charitable giving (we Tithe) and mortgage interest is where most of our refund comes from. That can’t be reduced through taxes withheld from my paycheck.
March 13th, 2007 at 7:31 am
Scarfish:
Good point (not sure if you were talking to me). One option I’m considering is just to raise my 401(k) contribution and not change my withholdings (3) so I lower my risk of having to pay next year. But I’m deduction strapped and I’m not sure changing my 401(k) would be enough (no mortgage, too much income for a student loan interest deduction (ARGH), etc.)
db
March 13th, 2007 at 7:33 am
Right about November, I decided to do a quick estimation of my taxes owed and thought I had underwithheld by too much so I told payroll to withhold my entire paycheck in December for taxes. Now that I’m doing the taxes, I see I understimated the deductions + overestimated gains from investments. So I’m going to get about 1.5 paychecks back — not too bad in that the IRS only held my money since December versus the entire year.
I may use this strategy again although with more accurate numbers. Withhold the absolute minimum every month and then bump it up in December to be just under the estimated taxes.
March 13th, 2007 at 7:35 am
J.D., your idea lead me to one of my own. While the idea of letting people designate where their money is going, I’m not sure I want 20% of our national budget going to pot farms.
Anyway, my idea was that the government could actually offer people a payback on overpaid taxes. Your refund would be collecting interest all year, and people could just have the government hold a higher percentage if they want to. I think this would be a great way to encourage people to save, and overpay, giving the government more cash to work with as well.
Just a thought.
March 13th, 2007 at 7:36 am
db, 401K/IRA contributions are above the line deductions. They always count whether you are itemizing or taking the standard deduction. The only case I can see it not helping is if you are in the 0% bracket (you make less than standard deduction + exemptions).
March 13th, 2007 at 8:04 am
Tax refunds aren’t windfalls. They’re just savings you didn’t earn interest on.
My wife and I save a lot of money every year, but we don’t at year’s end suddenly consider our year’s savings as a “windfall” or “mad money” to spend indiscriminantly.
If you don’t have the discipline to save, get into some kind of forced savings plan with your bank that makes you interest instead of losing money that should be yours.
I used to be lousy at saving, but my wife showed me that the first step is to get rid of that “easy come, easy go” attitude about money. Every dollar counts. And if you can earn interest but aren’t earning it, then you’re losing money via inflation.
You wouldn’t stand on a street corner and rip up twenty-dollar bills, but that’s essentially what you’re doing if your money doesn’t earn interest. You’re missing out on making money for essentially doing nothing, and you can’t get a better deal than free money.
March 13th, 2007 at 8:13 am
Wow, that’s lazy.
I’m also available if you want to expand your interest free loan chairty, since it’s working so well for you.
March 13th, 2007 at 8:30 am
There’s another argument in favor of intentionally choosing to withhold more tax rather than less, in hopes of getting a refund: if your financial situation changes from year to year, and there’s no way to know what your final bill will be beforehand.
In the past several years, our family finances have experienced the following curveballs:
–switching back and forth between standard and itemized deduction, due to buying a couple of houses, and sometimes paying enough interest to itemize and sometimes not
–having two children, which itself triggers changes in tax liability, and sometimes paying for day care and sometimes not
–significant variability in income, including a big increase in salary (yay) but also some periods of unemployment (boo)
–starting a new business
Every single year since we married (’98) our situation has been different. There is NO WAY we’d be able to pinpoint within $100 what our final tax bill would be.
The government doesn’t penalize you if you overpay them, but they can penalize you if you significantly underpay. We choose to err by trying to pay too much, so that when the dust finally settles, we won’t be in for a very unpleasant surprise.
March 13th, 2007 at 9:15 am
I don’t really know anything about tax returns (slightly different system over here, I essentially don’t make enough to file one).
But I love the idea of being able to designate where my taxes go, although I’d worry that in the rush to spend more on education, police and hospitals we’d all forget to spend anything on roads or something dumb like that. Maybe they could do multiple choice.
March 13th, 2007 at 9:29 am
I agree with Angie on this. When my (now ex-) wife and I separated she decided to file taxes separately without asking me first. That meant I also had to file my taxes as “married filing separately,” which was the highest tax rate around. Instead of getting a refund, I got hit with a tax bill I couldn’t afford. I actually had to sell my car to pay my taxes that year, and spent the following six months without transportation (and I lived out in the country). I was in great shape from walking everywhere, but ever since then I’ve erred on the side of having too much withheld from my paycheck.
March 13th, 2007 at 9:47 am
I also fall into the “big refund” camp. I typically get around $2300 back from the Feds per year, and around $600 from the State. A few years ago I visited the HR office to see about withholdings, and was told that my withholding was “fine”; however, I suppose I could ask that no withholdings be made.
But I’m not sure I really want to, even though this $2900 could generate a bit more interest much earlier. I teach at a university, and only get 9 paychecks per year. I’m good at saving money each month for the dry summer months, but the tax refunds actually help me make sure I’ve saved enough–for living expenses and for travel.
If I had less money withheld, I’d run the risk of actually owing money, and I’m not sure I want to risk that as the summers draw near.
March 13th, 2007 at 10:29 am
“If I had less money withheld, I’d run the risk of actually owing money, and I’m not sure I want to risk that as the summers draw near.”
I don’t understand this line of thought. Are you trying to say that your only options are between owing and getting $2300 (federal) back? I realize not everyone can estimate within $100, and some people don’t want to. But you can certainly guage and deduct many things between risking penalty and getting $2300 back. Especially when it’s almost $200 a month extra you’re paying, even lowering it to almost $100 and you’d still be way over…
March 13th, 2007 at 11:43 am
You can always go to the IRS website and use their calculator to estimate your taxes. It helps you determine your allowances for your W-4. Do what I do near the end of the year: In November, I use the IRS calculator to figure out what my taxes are going to be. If it looks like I’m going to receive a refund, I fill out a new W-4 and change my allowances to 99 so that NO tax is taken out for the rest of the year. It’s a nice holiday bonus. Just don’t forget to change your W-4 back before your first check in Jan.
March 13th, 2007 at 1:33 pm
I have to disagree on this one. I think this is one of the first fundamental shifts in learning that need to take place before you can right your financial ship. Coming to the realization and follow through that you DON’T want to lend out your money tax free to the government is a baby step toward taking your personal finances by the reins!
March 13th, 2007 at 2:35 pm
I don’t think people who love getting big refunds are “stupid” or anything.
I just find some people may be a little ignorant and lacking tax/financial knowledge..and not really UNDERSTAND how taxes work, why they get such a refund,etc. They just think they are getting some windfall out of thin air.
I think your view is balanced to an extent.
Since I have a natural distrust of government and know how they waste so much money, I disagree with the idea of the interest-free loan as a form of “charity.” I would rather give the money to an actual charity that is somewhat accountable. Or cut out the middle men and give the money to people who need it.
Somehow, giving the money to a “charity” that will buy 145,000 trailers on no-bid contracts at the highest possible cost to taxpayers and then have over 40,000 of them sitting in an industrial park unused while thousands of people remain homeless- doesnt exactly appeal to me.
But hey, and this is the real point, it is YOUR money. Use it as you wish. Give interest free loans or not, buy comics, have a vacation, fund the IRA- whatever is meaningful to you. A lot of people just see it as some extra money to blow. Can’t say I havent done that myself. I got a little over $2000 this year. I’m using it mostly for things I have gone without for a long time- clothes, car repairs,etc. And the way things work, I dont think I could’ve gotten much of that over the course of the year anyway.
March 13th, 2007 at 3:10 pm
I’m with JD on this one.
I put $350 into savings each month, plus some into a 401k. On an entry-level librarian salary, that’s not chump change, so it’s not as if I’m saving nothing without a tax refund. But… as it gets to the 25th of the month, it’s very easy for me to say, “Ooh, look, I’ve still got $50 or $100 in my checking account. There’s that book I’ve been eyeing at Borders… and I feel like an ice-cream sundae…”– better for me if I never see that money. Yes, I put some of it into savings–but I can’t predict my expenses for the month with enough exactitude. So I’m happy to get a chunk all at once that I can put directly into savings, rather than a larger amount of extra money spread out over the whole year but that would only get spent on frivolous stuff.
March 13th, 2007 at 3:50 pm
Mossy — I know that it would help to raise my 401(k) contribution, I just don’t know if it would come out to $0 at the end of the year, or if I’d still owe, but less than I would otherwise without raising my deduction back up to 2 or 1.
My ideal would be to hit it right on the head and owe $0/receive $0 at the end of the year. I don’t want no steenkin refund!
I think what I’ll do is leave things the way they are and in July run that IRS calculator to see if I’m on track or whether I need adjustments to my plan.
I lowered my 401(k) and raised my deduction to have extra money to shovel at the debt anyway. In July I should be down to just one credit card left outstanding, which is when I was planning to bump up my 401(k) a notch.
db
http://www.debtblitzkrieg.com
March 13th, 2007 at 4:01 pm
Not to argue with you but you write, “I lowered my 401(k) and raised my deduction to have extra money to shovel at the debt anyway.” Good intentions, but of the $2789 less than 1/2 went towards debt repayment. Unless you mean repayment weekly?
Either way as long as you have a plan that works for you that’s the important thing.
March 13th, 2007 at 4:21 pm
I just started a new permanent job, and with all the deductions (benefits, union dues, life insurance, plus regular government deductions) I’m thinking it would be worth it to have the government take less income tax out of me. I know I filled out a tax form when I started the job, and on the back you had this option to have less tax taken out, but I guess I’ll have to contact Revenue Canada about that. Anyway, I always get disappointed when I don’t get a big return.
March 13th, 2007 at 5:52 pm
Uhmmm… what did your wife get to do with her share of the money?
March 13th, 2007 at 6:03 pm
Good question, Kelly. She’s saving it. She’s debt-free. I suspect she plans to use it for vacation this summer.
March 13th, 2007 at 6:25 pm
Little Piggy:
What $2789? That’s my comment, but not my figure. Nowhere did I claim that figure. My goal was to have the maximum possible paycheck every time I was paid to shovel at the debt.
JD is the one who got the $2789, not me.
March 13th, 2007 at 7:23 pm
I hate to admit it, but receiving a big tax refund is also a pleasure of mine. It’s obviously very nice to receive that check, especially as you are not expecting it.
Having said that, I reduced my tax withholding to $0 last year, as I have six kids and never have to pay taxes (that’s not the reason I have so many kids!) … and used the difference to fund my savings and debt reduction. I’m still waiting on a couple big checks from previous years though. Can’t wait!
March 14th, 2007 at 4:56 am
I’m really surprised at the number of people that actually enjoy getting a refund. I honestly thought people would be outraged at this idea. To me, this is crazy. I’m not talking about the math involved either. The amount of interest you’ll accrue is usually negligible. I’m talking about behavior and mindset.
90% of personal finance is psychology. If you like the idea of a refund, you are basically telling yourself that you can’t be trusted with your own money. Your saying - I can’t manage my own money, so I’m going to get some “help” from the government (an entity that has managed to rack up *trillions* of $ in debt). Yeah - let’s get help from them - great idea. And then when you do get your own money handed back to you, you treat it as some type of windfall? Insanity.
This is the same type of mentality that leads people to buy lottery tickets. Deep down you feel that you need a miracle to be financially independent. You need to be bailed out by luck. You need somebody or something else to step in and help you because you don’t believe you can get there on your own.
I never want a refund and I’ll never buy a lottery ticket, yet I am 100% certain that I’m going to be completely debt free, financially independent, and have several million dollars by the year 2024 when I turn 55. This is because my wife and I have a plan for our money. A plan that doesn’t include inheriting money, winning the lottery, or getting tax refunds.
I admit that I used to look forward to a refund and buy lottery tickets when I was in my 20s. Guess what? My personal finances were an absolute disaster when I was in my 20s.
Take personal responsibility and figure out a way to budget and save your money wisely people. It may take years before you find a system that works for you, but at least you’ll be growing and learning to handle money.
If you surveyed every single millionaire in the United States, you wouldn’t find a single one that said they made their money with tax refunds. This behavior goes completely against the grain when it comes to building wealth.
I visit this web site every day, and I really enjoy it, but this issue has me seriously considering dropping this site. I can’t help but feel that I’m surrounding myself with people that are headed in a direction that is the exact opposite of where I want to go.
-J
March 14th, 2007 at 5:31 am
[...] Why I Love A Huge Tax Refund It makes sense from a financially conservative point of view. (@ get rich slowly) Related Posts The Simple Dollar Morning Roundup: Post-Super Bowl EditionThe Simple Dollar Morning Roundup: End of the Year EditionThe Simple Dollar Morning Roundup: Three Sites You Need To Read EditionThe Simple Dollar Morning Roundup: Parent’s Night Out EditionThe Simple Dollar Morning Roundup: Thanksgiving Prep EditionThe Simple Dollar Morning Roundup: Transfer Tuesday EditionThe Simple Dollar Morning Roundup: I Gained Twelve Pounds EditionThe Simple Dollar Morning Roundup: Last Minute Buying Frenzy EditionThe Simple Dollar Morning Roundup: Tired Boy EditionThe Simple Dollar Morning Roundup: Ham, Corn, and Cheese Chowder Edition Did you like this article? You can get the complete text of all the latest articles at The Simple Dollar in your email inbox each morning by entering your email address below. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time. No comments yet. Be the first. Leave a reply [...]
March 14th, 2007 at 5:36 am
@Jag Nogg: Everyone has different priorities when it comes to fiscal responsibility, and indeed there is no universal definition of fiscal responsibility. For many of us, building wealth is not the main focus of our lives, and if we forego a few dollars in interest each year because we withhold a bit too much from our paychecks, it’s not the end of the world. I think everyone here is fully aware that they’re not behaving in a financially optimal fashion and yet we’ve made the choice to do so. Setting your home thermostat at 70 degrees instead of 55 isn’t financially optimal either, but it makes some of us more comfortable so we do it even though we know we’re foregoing an opportunity to “build wealth.”
March 14th, 2007 at 5:57 am
@Brad
I understand what you are saying. In every day life I don’t take such a critical view of things, and the exact reason I took control of my finances is because I DON’T want it to be the main focus of my life. Taking control of your finances doesn’t mean obsessing over them. 95% of my finances are on auto-pilot right now.
I was extra critical because this is a site about Getting Rich Slowly, and personal finance.
To use your example - it’s like somebody posting an article to a engery conservation web site entitled “A Contrarian View: Why I like to crank my heat up.” I’d be shocked if most of the people on that web site left comments agreeing. That’s all I’m saying.
I hope I’m not coming across as a know it all, because I certainly don’t. It took me a long time to become responsible with money. Along the way I needed to be told that I was being stupid. Now I’m returning that favor
March 14th, 2007 at 6:21 am
Jag, that “crank up the heat” analogy makes me wince, though it may be fair. (Part of that’s because I’m not a crank-up-the-heat kind of guy!)
I can understand your problems with this mindset. In fact, it’s because of similar ways of thinking that I’ve decided not to pursue tax refunds in the future. Like you, I’ve reached a point where I can see that a tax refund is not a smart choice for me, and I’ve developed the personal responsibility to deal with the smaller chunks of money as they come in during the year.
But, as I said, I do think this issue is like the debt snowball. From a purely mathematical perspective, the debt snowball doesn’t make sense. But it works. It worked for me. It has worked for millions of other people. Sure, we spend a little more in interest, but we don’t care because ultimately this approach allowed us to pay off our debts. That’s the important thing.
So, too, with a large tax refund. I think that recognizing you have a weakness and then working around it can be smart. Are there better ways to work around spending problems than to let the government keep your money? Absolutely. But few are easier because this method occurs at the source, at the paycheck.
(Actually — and I can’t remember if somebody suggested this already or not — it occurs to me that the smartest thing to do would be this: have an amount equivalent to the extra withholding automatically drawn from your paycheck and automatically tucked into a high-yield savings account. At the end of the year, pay any taxes out of that. Otherwise, treat it like a tax return. Hm…I like this idea so much that it’s destined to be a money hack…)
So, Jag, I can understand your frustration on this issue, but I don’t think it warrants quitting the site. (I hope not, anyhow!) I think all of us “refunders” recognize that it would be better not to get one, and many of us are working toward the day when we don’t take one. For me, I’m hoping 2007 is that year.
March 14th, 2007 at 7:17 am
JD,
I completely agree with the debt snowball concept because it is designed to give you an emotional and psychological boost, even though mathematically speaking it isn’t optimal.
That’s why I said in my post that “I’m not talking about the math involved either. The amount of interest you’ll accrue is usually negligible. I’m talking about behavior and mindset.”
I feel that getting a tax refund has a negative impact on you psychologically emotionally, and that taking your money out of the government’s hands and putting it into your own empowers you. I think you would be much better off to stuff the money in your mattress and earn zero % interest than to let the government hold onto it. At least you’d be taking control of your money that way.
March 14th, 2007 at 7:48 am
Jag Nogg wrote, ” If you like the idea of a refund, you are basically telling yourself that you can’t be trusted with your own money. Your saying - I can’t manage my own money, so I’m going to get some “help” from the government”
I disagree.
Taxes are, I think, in a different class than any other financial obligation, which is why they generate so much Sturm und Drang, and why I think so many people choose “the easy way out” of paying extra withholding.
Taxes are truly obligatory in a way that other financial commitments aren’t. Remember the old saw, “Nothing is certain except death and taxes”? The worst thing that happens if you can’t pay your credit card bill is a big bunch of interest…but the worst thing that can happen if you don’t pay your taxes is Big Trouble With Uncle Sam. I think it’s reasonable for people to want to give that a wide berth.
Taxes can also be way, way more complicated than any other bill. For someone whose finances are settled with a 1040EZ, yep, probably pretty straightforward to go to those IRS calculators and hit it within $100.
But when you step it up to the 1040A, much less the full form with schedules besides, there are exponentially more variables and figuring out your tax bill is NOT trivial. Furthermore, tax law constantly changes every year, and can even change after the damn forms are printed!
In the situation I outlined above, where our family situation has been in such flux in the last several years, it is just Not. Worth. It. to add an additional layer of complexity to our financial lives by obsessively fiddling with our tax withholdings. Sometimes the circumstances that affect our tax bill in the end are out of our control (sudden, unexpected job loss). Sometimes finances are only a small, and not the most important, part of the decision (having kids). Sometimes we are in a whole new territory of the tax code and recognize that there are rafts of technical language we don’t recognize, so we need to hire a tax pro to do our taxes and teach us what we need to know for the future.
I suppose you can argue that the preceding paragraph means that I’m admitting that “I can’t be trusted with my own money”. I disagree. At least in the financial realm our family inhabits, taxes are an adjunct to all the other bigger financial decisions we make. They are not the determining factor.
I suppose when you start getting into those rareified top income brackets, where the tax bill gets a lot steeper a lot faster, it can become a much more high-stakes decision. For the rest of us mere mortals, it’s just not that make-or-break and playing it super-conservatively (paying extra) makes sense. A refund is making lemonade out of the lemons of having to pay taxes at all!
March 14th, 2007 at 12:13 pm
@Angie
You make a lot of great points. Taxes can become very complicated and you may want to be cautious about paying too little, or hire a tax professional if you have several tax impacting changes in your life.
The people I am talking about are the people that would choose to take a large refund regardless of how difficult or easy the tax forms are. People have said that they like having the government hold their money because it forces them to save.
My point is that you aren’t going to learn how to handle money well if you don’t even want to handle your own money!
March 14th, 2007 at 2:00 pm
[...] counseling and debt management organization in the U.S. — dropped a line yesterday. He saw my story about tax refunds and wanted to remind me of a new MMI site devoted to the subject: We just released a new tax-themed [...]
March 14th, 2007 at 5:44 pm
I have an associate that has used a “perfected” version of this strategy for over 5 years (ever since buying his house.) Rather than learning to file his tax return under hsi more complicated situation, or pay someone to do it, he STOPPED FILING his tax returns instead.
He almost certainly is owed considerable refund money by the IRS (part of 2.2 billion dollars in unclaimed refunds, per the IRS website). He continued to pay his taxes of course via withholding, just didn’t claim his refunds.
Unfortunately, needing the money this year, (since he can’t take out another home equity loan after being laid off), he discovered that the IRS will not pay refunds after 3 tax years. He has thereby lost several years of refunds probably amounting to thousands of dollars through his strategy of inaction.
Meanwhile, he continues to pay his HELOC payments, hoping the last few IRS refunds get to him before his meager savings deplete. Assuming he can find all his tax paperwork, that is.
My moral for this story: Ignorance is rarely bliss. Study, then make an informed decision.
March 14th, 2007 at 6:50 pm
Do people really think about this that carefully? I’ve always taken the number of exemptions suggested by the IRS when filling out the initial tax form to withhold taxes. When I was young and earning less this meant I got refunds, now that I earn more this means I owe a decent chunk of money every Arpil (but it’s within the IRS guidlines - less than $1000).
March 14th, 2007 at 6:59 pm
Jag, I’m not sure I agree with your main claim that one’s preference for getting (rather than preventing) a tax refund is necessarily a sign of lack of financial control. In my case, I already save/invest over 25% of my income, and I keep the rest of my finances simple so I don’t have a lot of financial issues to worry about controlling. At this point in my life, the refund represents the convenience of being able to do things with my time other than worry in more detail about my cash flow. Though financial control is a big interest of mine, it isn’t my only major interest.
My take on “getting rich slowly” is also “getting rich simply.” In the future, if I have some extra time to sit down and crunch numbers, I may try to steer away from the refund thing. My itemized deductions vary each year, however, so that would be tough to do, and I’m not sure it’s worth my time to get into it.
At this point, even though it’s not the ideal and most hands-on way to handle finances, the refund gig does help simplify my life, and it allows me to pursue other interests without much concern and complication. For some of us, that’s the point of having money. There are many strategies for saving and “getting rich slowly,” and it’s possible that the perceived disadvantages of one strategy actually help to make the perceived advantages of other strategies work.
If I depended on the refund for my basic living expenses, perhaps I would agree with your claim. However, even though the approach isn’t the best, my financial control seems to be quite fine. I’m sure many other people with similar circumstances feel the same way.
March 18th, 2007 at 8:48 am
[...] Get Rich Slowly loves a huge tax refund. [...]
March 20th, 2007 at 5:50 am
[...] let loose at Costco the other day for the first time in nearly two years. Using tax-refund money, I bought several pairs of pants that are one-size-too-small (an incentive to continue my wellness [...]
March 31st, 2007 at 8:01 am
[...] Mar. 13th: Why I love a huge tax refund [...]
April 1st, 2007 at 11:38 am
Like you used to be, I also tend to spend any extra money that I have (although I am getting better at paying my savings funds first). We are saving our large tax returns for a down payment on a house. We still have last year’s and are waiting for this year’s. Next spring we will be ready.
Your right, if it helps you save, then by all means, do it!
April 3rd, 2007 at 6:38 am
One of the best things I’ve done for myself is to have extra money withheld from my paycheck.
I’ll be 24 years old this month, my income is low, and my debt is high (college loans). I’m paying about $600 a month toward my loans in an effort to get rid of them ASAP, and I have a bit of a spending problem (hence why I’m reading this blog).
I do most of my ‘active’ banking through a credit union, but opened up an account with ING Direct a couple of months ago strictly for saving. The thing I love most about ING is what most people hate - it takes a couple of days to move money, so it’s not especially convenient.
This year, I took my $2500 tax return and dumped it into my ING Account for savings ONLY. As long as I had the discipline to make that intial transfer and let my laziness prevail to prevent me from transferring it back to my credit union account, that money will sit there and grow. In the future, I’d like to invest it at a higher rate of return, but I don’t want it completely inaccessible, as my emergency fund isn’t yet as big as it should be.
Bottom line is that money would be gone if it trickled in every two weeks. A larger sum seems more significant and encourages me to be more responsible with it.
April 6th, 2007 at 7:29 am
[...] However, if you are going to spend the money anyways, getting a tax refund can be a wise decision, since it forces you to save. Some folks love getting a lump sum, while others argue for finding a balance. [...]
April 13th, 2007 at 5:01 am
[...] what this site is about. I encourage you to subscribe to my RSS feed. Thanks for visiting!Because I love a big tax refund, I filed my return long ago, received the money, and used it to pay down debt. But like many [...]
June 28th, 2007 at 5:29 pm
JD, another wonderful article!!!
I would like to add two worthless cents LOL!
If you don’t want to invest in high return investment accounts or even some form of IRA or 401(k), then just think about simple savings accounts. $2789 / 26 bi-weekly payments = $107.27 Pay that amount less in tax, and put into savings at 4.75 or 5% interest. If you miscalculate, pay the small amount out of the interest you earned and you still have the rest for you.
Otherwise, look at other tax free ways to put that weekly money to use.
Never take the difference as extra pay, as most will just spend it.
Either way: savings or investment, your paycheck is the same, but you are paying yourself, not the IRS on an interest free loan.
December 17th, 2007 at 10:00 am
[...] rough out our tax situation as soon as the forms became available. Because I insisted on having too much withheld from my paycheck, I was anxious to know how large my tax refund would be. (This was the only way I could make myself [...]
February 11th, 2008 at 4:04 am
[...] at Get Rich Slowly concurs when reporting on the size of his last year: Already I can hear the sound of hundreds of [...]
February 21st, 2008 at 11:12 pm
[...] I generally agree with this advice, but every thing does depend on your own preference. Some people explicitly like tax refunds despite the disadvantages so I can’t argue against [...]
April 1st, 2008 at 10:29 am
i think the immature justifications riddled throughout this page are exactly why our country has a negative savings rate and debt up to their eyeballs. the original post even lays out all the big reasons why this is stupid. to go any further and try to justify and/or disprove any of the wisdom in those reasons is ridiculous. Grow up and learn discipline. tricking yourself into “saving” money so you can treat it like a gift and blow it on BS is simply juvenile. Think about it people. seriously….
April 1st, 2008 at 12:52 pm
This year, through RRSP contributions and gov’t rebates and moving expenses, I should get a refund of about $4000. The only debt I have at the moment is my mortgage, so that money is going to a savings account for house repairs or perhaps I’ll start investing into Index funds? I just don’t know what is available in Canada vs. USA. I suspect they’re the same and I can buy into the US ones if I like.
April 25th, 2008 at 4:00 pm
[...] to Check the Status of Your Tax RefundTax Refund StatusTelephone Excise Tax RefundA Contrarian View: Why I Love a Huge Tax RefundHotels and Airfare: It Never Hurts to Ask for a [...]
February 18th, 2009 at 7:58 am
I am weird. I save in my 401K, have money in an emergency fund, AND like to get a big refund back. It used to be 6K but now I put it down to 2K. Strangely enough the people who give me advice not to do this are people who are in debt, while I am not. The reason? I control my budget very carefully, and that can be boring, to know where every one of your dollars is going. Once a year it’s nice to feel rich. That is the time of year I send checks to charity, set aside money for big purchase items, and yes even put some into savings. As Dave Ramsey says, money is more psychological than financial. Even if that 6K was in an account bearing 3% interest, thats $180 in interest (that is also taxed)
February 18th, 2009 at 2:21 pm
Another reason to not get a tax refund:
One day they might do what CA is doing: just send you a pretty “IOU”.