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.
Your large income tax refund is 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 your large tax refund
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?
Recommended Tax Preparation Software: TurboTax | H&R Block | CompleteTax.com
{ 18 comments… read them below or add one }
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!
This is all screwed up. There is no way someone should get back more that they paid in fed taxes. I am single with a decent paying job. I usually get $110 or less in returns and usually owe state. I know people who make like $18000 a year, barely pay $2000 in taxes and get $7000 refunds. This person is going to buy car. So the govt is buying her a car.
My ex by the time she claimed my 2 kids, collected child support every month add up is almost what i make yearly.
I have no problem with the govt paying welfare, food stamps, housing, and electric bills for the poor. But these people do not deserve these large tax returns.No one should get more back that they paid in.
To be blunt i need my $ to help my kids go to college. If i had these types of return i could have sent my kids to private school. I am tired of paying for other peoples poor choices.
Do you really think people can live off of a mere 18000 a year? My husband worked at a very physically demanding job for an annual salary of 18000, (15,000 after taxes and whatnot). He injured his back and lost his job in December for calling off for some doctor’s appointments because of the strict point system his employer had. I cannot work because I unfortunately suffered a lumbo sacral plexopathy injury rendering me unable to drive. (My disability case is still pending so no income from myself.) Doctors won’t sign a medical release because of inconsistencies and weakness in my legs. We have two children to support and pay over 500 a month rent and pay our own utilities. We do collect food stamps. Unemployment claim still processing after over a month (can take up to 8 weeks). When it does process, he will only be receiving 250 a week before taxes are taken out of the check. He has been searching diligently for any type of employment. Also, the truck we were using is basically shot and would cost the same to get ready for inspections, which were due this month, as it would for us to get another vehicle. If it weren’t for the EIC and additional child credit, my family would be utterly and completely screwed. My tax refund will allow us to get a cheap, reliable, family car; allow us to pay some overdue bills; get some oil for our house; (and possibly get a dental surgery I have been needing for 6 months that I couldn’t afford because the cost is 550 after insurance). The tax credits are for people who do not make enough to make ends meet. If the credits were as unfair as you are assuming they are, they government wouldn’t have them. Even if you add together the food stamps we receive, the Liheap funds, our wages, and our tax return, the total we live off of in a year is still well under 30k for a 4 person family. We’re not going to be living in the lap of luxury because of our return, just be able to breathe a little easier.
I just wrote about the same thing on my blog! I knew I should’ve googled to find this article first! Great points. I could NOT agree with you more.
Those that get a big refund get it because our country takes care of the poor and makes us pay, so they can live a good life like those of us that actually work and get almost nothing as a Refund. Those that earn more should get back a big refund, but it’s not going to happen as long as we have lazy low income people living in this country.
I think we’re talking different things here Jose. I’m referring to people who have more withholding in their checks than they need to and end up getting big refunds.
Considering I worked up until the point of becoming disabled, how am I lazy? I have straight A’s in my college courses so I can hopefully someday find a way to earn an income.
Also, how the hell is my husband lazy? He worked his ass off for shitty wages because it was the only job he could find. Times are tough.
Instead of complaining about other people receiving the help to better take care of their families, maybe you should be more grateful that you can earn decent wages. Or better yet, maybe you should learn to be grateful that you CAN drive and you CAN work. I am not that fortunate and have cried after each and every doctor’s appointment when I get reevaluated to work or drive that my normal doctor and neurologist deny me the opportunity. According to you that makes me a lazy low income person living off the government?
People earn a low income and have many children because our Government rewards them like they do to the illegals that live in this country. We pay for all of their benefits and we get ( part ) only what we pay, and nothing more. So, is this fair to those tax payers that get a low sum, while others get much more and don’t pay a penny of their money on taxes.
Eliminate the EIC. Those that qualify for the EIC get back a Big Refund and it should be the other way around. If I want a Big Refund I would have to ask my employer to withdraw twice for withholding taxes to give to me back a Bigger Refund.
{ 3 trackbacks }