Why Getting a Large Tax Refund is Bad
March 19, 2008
As I mentioned in my last post, Surprise in our Bank Account, we received a pretty large tax return this year. It’s great to see our bank account take a nice jump but what I’m going to tell you now is why a large tax refund is bad.
It’s an interest-free loan to the government
When you get back a large refund it means the government was able to hold on to your money over the past year to do with as they wanted. And what do you get in return fro allowing them to hold your money? You get your money back. That’s it. It was a free loan. Know what happens if you owe the government money for a year? Penalties and interest tacked onto what you owe. Even a low-interest savings account gives you something back. So why loan your money out for nothing?!?
Inflation
As defined by the
Bureau of Labor Statistics, inflation is “a process of continuously rising prices, or equivalently, of a continuously falling value of money.” What this means is a dollar today will be worth less than a dollar a year from now. There’s a neat little inflation calculator on the BLS site. Plugging in $1000 for 2007 I see this has the same buying power as $1020.98 in 2008. This means I need $20.98 more in 2008 to buy what I did in 2007.
Let’s look at this another way. If you get a $1000 tax refund for the previous year it’s really only worth about $979! By letting the government hold your money you’ve lost $21 in spending power! That doesn’t seem like a good deal.
You may be inclined to spend it
I hear so many people say something along the lines of “I can’t wait until I get my tax refund so I can buy…” Getting a big chunk of change at once can give someone big eyes to go spending. If you have the money broken out in smaller pieces in your paycheck rather than one lump sum you may be less inclined to spend it all on a big purchase.
It’s your money!
This is a simple one. The money is yours. Why wait for it? Look, if you like lending money out in small pieces just to have it handed back to you in one lump sum at a later point then contact me and I’ll hold it for you! Really. I’d love to have your money growing in my accounts. I’ll give you back what you gave me.
So what to do? The goal should be to get as close to zero as possible on your tax return (you don’t owe taxes and the IRS doesn’t owe you a refund). MSN Money has a nice article called Get Next Year’s Tax Refund Now which talks about changing the withholding on your W-4 form so that you can get more in your paycheck rather than pay out more taxes every pay period and get a large refund next year. I recently changed my W-4 and now I’m getting an additional $125 per paycheck. That’s $3000 for the year! Check with a tax professional if you should have any questions.
Do you usually get a large tax refund?
Sign up with ING Direct and get a $25 bonus. See here for details.
Make sure you subscribe to my feed to stay up-to-date with Free From Broke!
Tagged as:
Money,
planning,
Taxes,
tips
Subscribe to Free From Broke
|
Follow Free From Broke on Twitter
{ 10 comments }
Tell me about it! We got a huge tax return and where expecting to OWE! So, we basically lost money by lending it to the government, if only we had known…
We also changed the withholding in my hubby’s paycheck, that will take effect this week, I am excited to see how much a difference it makes. 3k a year extra sure would be nice!
Take Care
LJ
I feel guilty you did all the work for me on my post at my Word press blog.But before I celebrate to much I Just got done busting my fanny on my original blog. Thanks for a great and timely post.
Depends on what qualifies as a “large” tax refund, my tax refund was about 2 percent of my earned income after deductions and taxes.
I don’t mind paying taxes, I rather be able to invest in our country and make it grow. What I do mind is the sloppy way our country manages our budget.
@ LJ - Good luck on your withholding. I hope it’s a nice amount!
@ Mark - Thanks for the kind words and the link.
@ LocoMono - I guess it’s all relative. Still, if it’s my money then I want it.
We all have to pay taxes. I agree with you on the budget though. That’s another good reason to make sure you get your money now rather than later. Why loan extra to the gov’t if you’re not happy with how they handle it?
I had a rather interesting return in 2007, I had just started a new job working customer service, mostly base pay, but a part was incentives and commission, so I ended up with a fairly large refund because of the 40% tax on commission.
@ Troy - It’s gotta be tough figuring out what to withhold as your salary probably changes. An accountant may be able to help you adjust your withholding so you could see more money in your paychecks.
The past couple of years we had actually ended up having to pay around 1000-1200$ because we hadn’t figured out the right withholding after my wife got a job. After adjusting it this past year, we ended up getting a small refund. I’ll take a small refund over a big tax bill any day.
@ Peter - I hear you, no one likes to pay. But at least you weren’t loaning it out for free. I think a small refund is right where I’d like to be too.
We got a fairly large refund, but I’m about 99% certain that the reason for that is the sales tax deduction. We claimed the sales tax on the vehicle we bought last summer and got ALL of it back (never mind that we are still paying the bank for it). However, we did something good and put that big refund towards debt.
@ JMDay - Nice job putting the refund towards debt!
Comments on this entry are closed.