If You’re Getting a Refund, You’re Doing Something Wrong

by Justin Weinger on April 13, 2007

For a lot of people, tax season is all about getting that nice fat refund check from the Federal Government and, to a lesser extend, from your state as well.  While it’s certainly nice to get this “unexpected” sum of money each and every year, it’s probably not the best way to go. 

By getting a big refund check, essentially what you’ve done is give the Federal Government a nice interest free loan.  You see, while you’ve been overpaying taxes and forking out your hard earned money each paycheck, the government has been taking that free money and using it for their programs.

Instead, what you should do is set up your withholdings so that when you file your taxes each year you get a very small refund.  The reason being, instead of having to wait for the government to give you back the money that’s rightfully yours, you’re going to get that money each and every pay check – and you can use that money to help build up your wealth.

Let’s look at a typical example:

Bob doesn’t pay much attention to his withholdings because he’s pretty content to count on that $1,000 refund check each and every April.  By back the $1,000 he has overpaid in taxes, he has not been able to put that money to work for him and has allowed the government to have a $1,000 interest free loan.

Now, if Bob would have gotten this $1,000 spread out over each of his paychecks, and put the “extra” money in a high interest savings account, he probably would have earned $30 in interest.

I know it’s not much, but it’s better than getting $0, right?

Anyway, I would definitely recommend that you talk with an accountant and set up your withholdings so that you’re simply paying what you owe in taxes and not a penny more.  While it’s certainly nice to get that nice big check from Uncle Sam each and every year, I’d much rather have that money working for me throughout the year than for someone else.

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{ 4 comments }

Mamid April 16, 2007 at 3:09 pm

the one problem with paying taxes is that if you underestimate how much you owe, you could be paying fines and worse. Better to pay an extra 5$ than to have to owe that 5$. Owing it would mean paying interest charges, fines, levies and more. Getting it back means a smile for you.

Saving Simply April 17, 2007 at 8:24 pm

Treating a tax refund as found money also tends to lead to unhealthy saving habits.

John April 18, 2007 at 5:31 am

You’re probably the same guy that thinks marijuana leads to heroin…

James May 14, 2007 at 11:47 pm

My Lord! I am so glad to see this viewpoint somewhere else besides out of my mouth or my father’s.

I tell almost everyone I can, especially around tax season, about this exact thing.

You would be amazed at how many people, even loved ones and friends, just get into a huff out of ignorance of how the tax system works, or tell me that’s the only way they can save money.

Please also don’t forget about the almost 600 billion dollars in the little reported (aptly named) Earnings Suspense Fund of the SSA. A URL is below to some background. This is one of those things you would not believe and think a conspiracy nut made it up.

http://www.consumeraffairs.com/news04/2006/02/ss_secret_stash.html

Great blog, keep it up!

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