5 Reasons Why It's OK to Get a Tax Refund
It’s that time of year when the mainstream media will begin chastising you for ending up with a tax refund instead of perfectly managing your prior year tax situation to avoid getting a check from Uncle Sam. To do otherwise would be giving the government a free loan, right? This view has been espoused annually like clockwork.
The thinking goes that since you don’t receive interest on the refund you get at the end of the year, in effect, you’re lending the government money at a 0% interest rate when you could have been investing it yourself throughout the year. Well, I view this critique as an inability to see the forest through the trees — much ado about nothing.
According to the IRS, the average tax refund was $2994 last year, a slight increase over the year prior. Based on this amount and the rationale below, you may end up feeling a little less guilty this year when you collect your refund check this spring. (See also: Find Out When Your Tax Refund Will Be Sent)
It’s Nearly Impossible to Get it Just Right
With all the various tax credits, deductions, multiple sources of income and other facets of our complex tax code, the odds of setting your withholding perfectly during the year to end up anywhere near a zero refund are quite low. Personally, I view this as a futile exercise, especially if it’s a difference of a few hundred dollars in the end. Couldn’t your time be spent on something more productive? If you put that sort of time and effort into researching ways to earn some extra money on the side, figuring out ways to save more money, or optimizing your existing investments, that may be a much better use of your time and resources. (See also: 10 Most Overlooked Tax Deductions)
The Free Government Loan Doesn’t Matter at These Rates
While many people irrationally focus so much on NOT paying taxes that they actually make poor investment decisions (like selling “losers” in December for the tax loss, even if it doesn’t align with their long-term investment strategy) or make charitable donations they can ill afford, likewise, some people abhor the idea of “loaning” the government free money so much that they can’t envision themselves receiving a refund the next year under any circumstances.
The reality is interest rates are at historic lows. With the average refund above of close to $3000, considering the fact that this amount is accrued across the whole prior year, let’s say at an annualized rate you’re “lending” the government $1500. With the risk-free interest rate over a 1 year period sitting at under 2%, you’re talking about foregoing income of around $30 or less. The horror!
A Forced Savings Account is Better Than Nothing
Right or wrong, many people find it so difficult to save throughout the year that a tax refund acts as a forced savings account. This extra money they would have taken home otherwise is basically written off throughout the year as background noise, especially since it’s often a complete mystery just what the refund will be come spring. With that in mind, many families go through the year using after-tax income on necessities and retirement contributions but the come spring — refund!
It’s an Automatic Emergency Fund
With so few Americans having a sizable emergency fund, why not use this year’s refund to kick off such a vehicle in the event of job loss, medical emergency or other unforeseen circumstances? Since small monthly surpluses are so easy to spend and make for tough emergency fund investments, this method of getting a mini-windfall in the spring is a much more tangible and impactful way to kick it off. While this year’s refund might only be equivalent to a month’s income or so, it’s a start!
It Beats OWING Money!
Realistically, it’s unlikely that you’ll hit it just right, especially if you have investment transactions, income from savings accounts or CDs, a bonus, credits, deductions and other myriad taxable events throughout the year. With this in mind, would you rather risk actually owning money? Coming out of a costly holiday season and heading into summer, I’d much rather be seeing money coming in than going out at this time of year.
At the end of the day, you can fault the government for their taxation policies and where money gets spent, but is it really worth burdening yourself with trying to micromanage a tax return when the downside cost equates to peanuts? By taking a look at this summary of Federal tax law changes for 2010, it’s evident it’s more work trying to keep up with the latest moving target than just focusing on the low-hanging fruit.