Last week I discussed some ideas on how you could spend your tax refund wisely. I mentioned I get a tax refund even though some financial experts consider this to be a bad financial move.
The consensus among those experts is, “tax refunds are for suckers!” Gee, sorry we’re not all suck-less like you, Señor Perfect – I’m assuming they are all men because ladies are nice and they don’t call other people suckers. A little pandering never hurt anybody.
Getting a tax refund means that we overpaid our taxes and the government is giving us our change back… after 12 months. It is like giving the government a loan without earning any interest on that loan.
Instead, we should adjust our withholdings so that we pay just enough taxes to come out even. This means more money on our paycheck, which could be used for something else rather than have the government hold on to it.
And those financial experts are absolutely right.
However, the fact that they are right doesn’t mean that those of us who prefer a refund are suckers. I’m not a financial expert, but I can see pros and cons to both: getting a tax refund and changing your withholdings to break even.
Not To Get A Tax Refund
Some financial experts suggest that we should adjust our withholdings so that at the end of the year we don’t get a refund nor owe any taxes… or at least get as close to zero as possible. That instead, we should get more money on our paychecks every time we get paid and use that money to put it in a high-yield savings account or invest it.
Instead of letting the government hold on to our money interest-free, we should give our money the opportunity to grow. Which, like I said before, is a smart move.
However, this only works for people who are already in control of their finances. Many people are living paycheck to paycheck and have very little savings. Some of those people are really struggling to make ends meet and having a bigger paycheck would certainly help. But the majority of those people are simply living beyond their means and having more money in their paycheck would probably not help their situation.
There are a large number of people that make a lot of money and still live paycheck to paycheck. It doesn’t matter how much money they are making if they are still spending more than they earn. Unfortunately, this is the case for the majority of Americans.
Also, you have to be careful not to underpay your taxes or you’ll get hit with an underpayment penalty, which will most likely be bigger than any interest you are earning in your savings account.
You have to be really careful with your finances and make sure that if you are living close to paycheck-to-paycheck you set aside enough money to pay taxes back every year. If you spent it, you could get hit with a penalty for not paying on time, or you would have to take out a loan and go into debt to pay on time.
There’s also the happiness factor. I don’t know one person that is happy about having to pay taxes when they file their taxes. We all have to pay the same amount of taxes – well, kind of – but it doesn’t feel nearly as bad when they take it out of your paycheck automatically than when you have to physically write a check to the IRS.
To Get A Refund
Getting a tax refund might not be the best financial move, but it is a form of forced savings. A lot of us have a hard time saving money each month, and by overpaying our taxes we guarantee that we will have some money at the end of the year. The trick is to use the lump-sum wisely and not spend it frivolously.
The average tax refund is around $3,000. If you change your withholdings to break even and put that $3,000 into a high yield savings account (currently at a 1% interest rate) you are earning $30 at the end of the year. Sure, it helps, but it won’t make a huge difference to your financial situation, while the consequences of not saving up enough to pay back taxes are big.
I could also argue that getting a refund is better for your health. I’m not crazy. Hear me out.
By overpaying, we have less worries about whether we have enough money saved up to pay the taxes at the end of the year. Less worries equals less stress, less stress equals better health.
Getting a refund also makes us happier, at least when that refund hits out bank account. It’s like getting a gift!
Yes, I know it is our money and it’s not a gift, but it is the same feeling we get when we loan somebody money, forget about it, and then that person pays us back. Every time somebody pays me back I feel good… “Oh wow, I have more money now!” It is not more money, it was my money to begin with, but it feels good.
Should We Always Get A Refund?
If you are in control of your finances and can’t wait to get your paycheck so you can have your money make you more money, and squeeze as much juice as possible out of your dollar, then you probably know what you are doing and could carefully adjust your withholdings. So go make that money, booboo.
But if you have debt, are afraid of overspending, and don’t have enough savings, then getting a refund is probably a smarter move. We wouldn’t want to miscalculate what our withholdings should be and have to pay a tax penalty at the end of the year.
At the end of the day, personal finance is personal and you should do what feels right for your situation.
Do you get a tax refund or are you one of those smarty-pants?