Why you DON’T want a Tax Refund

For many people February through April means a “bonus”. Ahh the good old tax refund. People count on it to catch up on bills, take a vacation, buy that luxury item

But is it really a financial windfall?

As folks eagerly await the amount the tax guy says they will receive it’s like the anticipation of Christmas. The only problem is the government isn’t Santa Claus. They aren’t just giving you money. That is your money they kept all year and you didn’t have access to it.

What is a tax refund? It’s in the name…it’s a refund on the taxes you paid last year. In other words…you paid too much.

Remember the months you had to try to skate by the last few days until your next check? The times you paid a late fee because you just couldn’t make the payment? The over draft fees because you were just short from what you needed?

The average refund ranges between $2800-$3200. That’s roughly $250 a month you should have had in your bank account.

“But I like getting that big check because I don’t save well”. Sounds like an opportunity to take control of your money. As outlined you are losing money by allowing this.

The government didn’t pay you interest on that money. And even with the current low rates of return you could have made some money, invested it, or at least not paid some of the fees I mentioned before.

Why give the government an interest free loan? They certainly don’t give you one.

So what do you do about it? Talk with your payroll department about adjusting your W-4, the form used to calculate your tax withholding from your paycheck. The IRS has a calculator online that’s been historically bad but I have heard they made improvements. A good rule of thumb is if your income hasn’t changed significantly then take the amount of last years refund divided by the number of checks you get each year. That’s the amount each check you need to bring home in addition to your normal check amount. It may take some tweaking and other factors like bonuses or over time can affect it.