If you’re like the average American you’ll be getting a tax refund check for just under $3000 this year. For many people getting that big tax refund is the highlight of their year! I can understand where the feeling comes from. Let’s face it, it’s not often we receive money from the government. But what too many people don’t realize is that getting a big tax refund check each year isn’t a good thing. Here’s why…
Can I Borrow Some Money?
“Please? Just loan me $3000 and I’ll pay you back next April, I promise!”
If one of your friends came up to you and asked that question, what would your response be? You’d probably tell them to get lost, in no uncertain terms. But by getting that big tax refund check from Uncle Sam each spring, that’s exactly what you’re doing. You’re giving the federal (and/or state) government an interest free 12 month loan!
With how much the talk of taxes dominates our political discourse, and how angered people get at just the thought of paying a dime more in taxes – you’d think there wouldn’t be anyone out there willing to let the government borrow their hard-earned money for an entire year!
You could have taken that money over the course of the year and earned interest on it in a savings account, invested it in a 401(k) or IRA, even paid off your credit cards or other debt. Any of these options would be exponentially better than letting the government hang on to it for the year.
You Didn’t Beat the System
Many people think that by getting a big tax refund they “beat” the IRS. Well, I hate to break it to you, but you didn’t. By no means does getting a big tax refund mean that you paid less tax than someone who broke even. The only reason you get a tax refund check from the IRS is you paid them more than you owed them. It was your money all along!
The best part is, you have complete control over getting that money when you should have it, instead of waiting until April. If you know you get a big tax refund each year simply file a new W-4 with your employer and have them take less money out of each paycheck for taxes.
If you don’t know how, or have other circumstances, such as being self-employed. Find an accountant or a tax professional you can talk with and they’ll be more than happy to show you what you can do to keep your money throughout the year.
Trust me, I get it. Getting a check in the mail feels great, but by planning ahead and keeping your money in your pockets from the start you’ll make out much better in the long run. It’s important to point out that you’ll rarely break perfectly even. If you’re only receiving/paying a few hundred dollars at tax time, just keep doing what you’re doing. But if you’re getting tax refunds of a few thousand dollars you should probably look at what you can do to adjust your tax withholding.
If you still insist on waiting until April and getting those big tax refund checks. Please, don’t compound your errors by going out and spending the money on something frivolous! Save it, invest it, or pay off debt with it. It’s the right thing to do!
If you want to see just how costly it can be to pass up earning interest on your money. Check out my article: Time is Money, Literally!
If you plan your finances around getting that big tax refund every year and are afraid of how to budget without it check out: Create a Killer Budget in 6 Steps