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Why you should be happy to get a tax refund, not guilty

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When it comes to be tax time, people love to start throwing around phrases that enrage me and make me wish to become a cartoon hero that points at someone and ejects a roll of duct tape towards their mouths to silence them. In my dreams, I would be a cross between Spiderman and a librarian.

Anyway, how often have you heard this phrase?

“If you get a tax refund, it means you’ve given the government too much money.”

This oft-repeated phrase assumes rationality: ‘If you get a refund, it means you sent extra money to the government! Why would you let them make interest off your hard-earned money? You should only send the minimum amount!’ Then these people are usually out of breath because of their own self-proclaimed brilliance.

Technically, they’re right. I live in a world of reality, however, which means that “technically” isn’t always correct. Here’s why I’d rather get a tax refund than owe the government money:

First of all, if you end up owing the government money at tax time, most people don’t have extra cash lying around. We know this because they are horrible at managing their money and have record debt rates. Sorry, it has to be said.

Second, how much interest are we really talking about? Let’s say you get a government rebate of $600. At my high-interest account, that’s $1.50/month in interest. Oooh, the government is making bank off my money! Get a life.

And, in fact, people’s opinions reflect this:

…when asked if they’d prefer to owe taxes, get a refund or break even, none said “owe,” according to the USA TODAY/Gallup Poll. Fifty percent hope they break even, and 45% hope they get a bigger refund this year than last.

In real life, $600 that you owe to the government would affect your life far more than getting $600 back, meaning it’s better to get money back than to owe it. So if you end up getting a tax refund, don’t feel bad. And don’t just follow what the pundits say. We live in the real world, and there’s a difference between the best decision and the financially smart one.

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Edit:
Q: “What about people taking their tax return and spending it on junk?”
A: Actually, researchers know that people will tend to save lump sums in times of economic hardship. That’s why the Obama administration, which knows about the psychology of consumer behavior, issued a tax refund to happen a few $/month — that way, people just spend it.

Very similar to what people would do if they increased their deductions and got a little more $ each month.

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You can learn about the applied psychology of money in my book.

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54 Comments

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  1. I agree only up to a point. If the refund really is $600, then letting the government hold an extra $50 a month is not a big deal. The bigger problem is people who get back checks of thousands of dollars. Let’s say $3000 (I’ve heard much more than that). That’s $250 a month the government has the use of, not you. I have an ING account as well, and if I put $250 a month into it for a year, I’ll have an extra $49 at the end of the year. Or I can put it into my Roth and have it for retirement. I can do what I want with it, and if I have it over the course of the year, I’m less likely to think of it as an amazing windfall the government gives me out of the kindness of its heart and take a vacation or buy a big screen or whatever.
    I try to get a little back (

  2. Reality is, that it’s difficult to estimate your taxes with 100% accuracy, so yes, if you overpaid and are going to get a refund, you can go ahead and feel happy about it. Certainly not guilty. And I agree that getting a refund beats having to scramble to pay more.

  3. I would have to disagree with you here. The better scenario would be owing money at the end of the year because it means you out-earned your projections from 2006 (in this case we’re filing 2007 now). I would much rather earn more money throughout the year and owe the government money come April.
    As far as people getting refund’s not timing it right, yea they are missing out, but they probably need the money more in April since they had such a crappy year financially (assuming that’s the case since they didn’t make enough to qualify in their tax bracket).

  4. I totally agree with you Ramit! People drive me crazy when they talk about taxes and you only mentioned ONE of the things that bugs me.

    You are dead on when you say that at the end of that year most people do not have that extra money.

    I had a friend that was bad mouthing our company because she got a raise and was going to have to pay more taxes? Yes, but you are paying more taxes because you are making more money! And this wasn’t some issue with changing tax brackets.

    Anyway, I hate/love how people throw logic out the window when it comes to taxes.

  5. It’s not a matter of owe, refund or break-even. It’s a matter of how much. It’s okay to owe a little, or get a little refund. But when you get back a lot of money, it means you’ve been overtaxed during the year. Say $600 is your refund. Over the course of a year, you could have put that $600 into a savings account and make some money. Compound that over the number of years you’ll be working and that’s a lot of money.

  6. I’m always amused when I hear people say stuff like this. What I wonder though is how many of them would have saved that money or wisely invested it and how many would have blown it on stupid crap throughout the year. I got a $5000 refund this year. I personally like the windfall, not because I’m going to blow it, but because it is a convenient savings vehicle. Do I earn interest? No, but I would have gotten about $1.50 a month from ING had I saved the 400/month (which I am not disciplined enough to have done). This way, I got my car paid off one year early and my student loans paid off finally. Do I miss that $18 in interest? No, I probably wouldn’t have gotten all of it anyway? Do I miss the $500 payment each month I am no longer making? Not a bit. Would I have been better off to throw away that money piecemeal throughout the year just to stick it to the man? No, I would not.

  7. I usually get a good (as in big) refund because I don’t bother correcting the number of allowances and withholdings.

    In the end, I’m pretty sure it’s better for me since when I finally get the check, I’m more likely to just put it on my savings account at once. If the money were given to me on my paycheck, I might just spend it…

    If you’re not convinced, just tell yourself you want the government to save the interest! Feel patriotic about it! … not convincing I know…

  8. I’m glad you made this point, even if it’s just a devil’s advocate point of view. Even though I intellectually understand that it’s better to owe a little than get a lot back, I would still rather get some back :0

  9. That last paragraph made me laugh:
    In real life, $600 that you owe to the government would affect your life far more than getting $600 back, meaning it’s better to get money back than to owe it. So if you end up getting a tax refund, don’t feel bad.

    Clearly you’ve never done any work for the government (or you hope your readers haven’t) – that $600 is not going to affect your life at all.

  10. I am glad you at least admit that the statement “If you get a tax refund, it means you’ve given the government too much money.” is correct. If you are not smart enough to manage your own money and need the government to act as a piggy bank for you, then by all means that is your choice, although it is a poor one.

    The money you save each month does not necessarily have to go into a savings account, but could be used to pay off high interest debt each month instead of waiting until you get a refund to do it. In the past I have used the money I have not loaned to the government to acquire rental property which further lowers my tax burden compounding the gain.

    Big or small, no return on your money should be discounted. Getting rich is a slow process where every opportunity must be tapped to it’s full potential no matter how ‘unpractical’ it may seem. Ignore the little things at your peril.

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