Vered@MomGrind

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.

jspin77

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.

Daniel

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.

Chief Family Officer

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

Sammer

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.

Carlin

So spending a few minutes to call and get a $20 finance charge waived is highly recommended by you, but spending a few minutes to get your tax withholdings closer to being correct and adjusting the direct deposit to your savings account to earn an extra $18 is stupid? Where’s the sense in that?

steve

If you owe over $1,000 two years in a row you have to file quarterly. That is enough incentive for me to get money back, as little as it is. I usually get back less than $2,000 and usually less than $500 each year. This year I did owe over $1,000 so I purchased an IRA to get the amount owed down to $950. Yes, I had a good year in 2007

Jack Payne

Interesting “take” on the refund.

naveedsmind

Ramit – I applaud your critical thinking here – and agree with you and some of your readers to a certain extent. The widespread view in society is the “government gets an interest-free loan” viewpoint. It’s valid – but it’s a nice breath of fresh air to see that you actually thought about this before biting into it. The majority of Americans (not necessarily your or my readers) are less likely to set up automatic investing plans. They’re likely to spend the extra cash. But that’s not everyone for sure. Bottom line – don’t sweat about getting an extra couple hundred back. And have a cushion built to pay an extra few hundred if that be the case one year. If you’re investment-savvy – increase you deductions and invest the saved amount. If not – just do what people typically do and wait until April to splurge/invest.

Naveed

Nathan

I’m surprised it was really only mentioned a few times above, but this issue is about volume. I usually do a quick estimate at the beginning of the year and go for a $200 refund or so. It takes very little time, and gives me some breathing room should I have made some mistake. At worst, I’ll end up owing a slight amount, which is not a problem. Either way, I can round to breaking even at the end of the year.

What I don’t understand are those who knowing pay hundreds extra every month and get back a $4000-5000 refund. Why not just setup a second account to have the extra money direct deposited there every month? I understand, you don’t want to spend the money and use this as a “safeguard” against that…there just seems to be an easier way, and the advantages of you possessing the money are endless.

There is also the “what if something goes wrong?” question that I think about. It’s the same reason I don’t use a debit card…if something happened, would I rather know that I have direct access to my $4000 or would I want to count on waiting for a check from the IRS sometime in the spring? I’m going to want the money every day of the week.

AJ

Your advice does not for the rational people who do save their extra money rather than spend it. It always makes sense for them to owe money at the end of the year. The $1.50/month may not be a lot, but why not take it? There is no reason not to.

Your advice also fails for those at the opposite end of the spectum: the irrational people with very poor spending/saving habits (many US citizens). The focus should be not on the interest the govt. is making off your tax money, but rather on the interest you are paying in not having the tax money earlier in the year. For example: suppose I am totally broke; had I not paid an extra $600 to the govt. during the tax year, I would have had to borrow $600 less from my credit card company, which charges me a ridiculous amount of interest. We’re not talking about $1.50 in interest here…we’re talking maybe a couple of hundred.

Rich

I really get frustrated how the government has manipulated the tax system and created the “refund” so we ignore the fact that we are truly being over-taxed. They even have a term for the money we don’t pay in taxes, “tax expenditure” meaning the money you earn is an expense to the government. Hard to believe there once was a time when the Supreme Court ruled a Federal Income tax unconstitutional.

Gousalya

I bought this ebook much earlier than this…don’t you think I more than qualify?

Neal

Don’t forget that the IRS can charge you interest if you don’t pay the correct amount of estimated taxes. This is especially important for those of us that are self-employed.

Aaron S

Ok, so I have to play devil’s advocate, but I actually believe this.

So let’s say you take that $600 dollars and instead of putting it into a savings account you invest it in the stock market. I’d rather have that money going into the stock market throughout the year other than waiting until my tax return to do so.

Idealistic, sure. Most probably wouldn’t do it, but its a justification to not want to have the government sitting on your money.

Denise Fisher

I’m siding with Ramit on this one. There are emotional/psychological factors that offset a purely rational approach to this dilemma.

For those who want to scrutinize the return on investment, consider these points:

1) If you get a $600 refund at the end of the year, you wouldn’t calculate interest you lost on that $600 for one year because that money accumulated after being withheld in smaller increments throughout the year (for simplicity, just assume $50/month).

2) If you rationalize that your money would be better used to pay off credit card debt or student loans, how can you be critical of those who have too much withheld for income tax? How rational is it to have a loan or a credit card balance in the first place? Why didn’t you just save up for your purchases before getting a car or a house or a college education? (I know, there’s sometimes a trade-off, and it’s not always feasible to save rationally, which is exactly my point.)

3) If you spend a couple of hours calculating how much you should have withheld each tax year, couldn’t you use your time more productively by working for those 2-3 extra hours and earning more money than you would gain in interest by making those time-consuming calculations? (Again, I’m not criticizing those who choose to spend time doing such calculations, I’m just making the point that not everyone wants to spend their time on such pursuits.)

4) If a person uses the “tax withholding savings plan” to save up for a major purchase that they can make when they get their tax return (instead of making the purchase today and putting it on a high-interest credit card that they’ll be paying off way beyond the next tax year), isn’t that a laudable approach?

My point is that people have different strategies, risk tolerances, and mental games that they use for determining how to save money. I wouldn’t count the tax refund issue as stupid or disastrous, as it’s often portrayed. The next step, in over-rationalization, would be to scrutinize the type of groceries each person purchases, or question why anyone should be buying a car with extravagant features, or criticize anyone who buys a house that has extra space or rooms that are not used on a daily basis (and does anyone REALLY need more than 5 or 6 changes of clothing?).

The fact is, we’re not rational robots. So you have to allow for personal preferences. Using a tax refund for a major purchase is not any different than putting something on layaway. I could think of hundreds of worse financial blunders than having too much income tax withheld. At least these people are thinking beyond their next paycheck and are not spending what they don’t have.

Writer's Coin

This is why you’re blog is so popular and why I keep coming back: you take everything everyone out in the blogosphere assumes and that is written to death and come up with something completely original. Keep up the great work Ramit! And by the way, do you have any association with WikiInvesting??

Josh

Well, I usually alternate between owing and receiving a small amount every tax season. This year due to a job change, we were over taxed for social security resulting in a large refund (3500). It wasn’t something I would normally be happy about. Ramit may be on to something though. It depends on what you are going to do with that return.

After moving for my new job I continued to pay my mortgage back in Detroit. While suffering through one of the worst housing markets in the county, I finally sold my 150K condo for a loss of 45K. Guess what…my 6 month emergency fund has evaporated during the 6 months of extra mortgage payments. Well that 3500 is going to start a new emergency fund in a time of relative crisis

Jarod’s Blog » Tax Day

[...] that my taxes were essentially balanced at the year’s end. I know, I realize it’s the equivalent of pinching pennies — but my crazy libertarian stripes come out every now and [...]

Spears

OK… Let’s be realistic here. I save money, as I am sure that a lot of people here do.

But, no one’s perfect, no one saves as much as they should. If I wasn’t paying as much into taxes, that money would be in my check, and I would put my allotted payments into savings, but the extra money from paying fewer taxes would go into my main checking account, and would be spent. As I am sure is the case with most people here.

However, I AT LEAST two thirds of my tax return into my savings or IRA when I get it. The other third went to a new pair of glasses, so even though it was spent, it was spent on a necessity.

Psychologically, it’s a lot easier for people to put a large sum of money into savings, rather than spending that extra $50 a month.

And, as Ramit said, $600 in an ING account would be $1.50 a month, that’s $18 a year. Waiting a year to put it in savings is not going to make that big of a difference.

Finally, I’ve been on the other side of the coin, I’ve had to pay, and it too me a couple months to recover from that. So I’d rather let the Government earn a little cash to be on the safe side.

Kelli Myers

We shouldn’t certainly feel guilty to get the tax refund. Finally it is our money that we are getting back. I agree to the point of paying the minimum amount to the government but not more than that.

Warren

I agree that Daniel, on April 10, is financially ignorant. He (along with many others) makes an argument that the interest earned on the extra money each month – in his case, over $400/month – is insignificant in the long run and that his “IRS savings account” allows him to get a big check at the end of the year to pay off his car early or pay down his student loans.

Daniel, if you had an extra $400 per month, you could pay it towards your car or you student loans! In fact, because you’d be paying down the principal each month more than you would with your regular payment, you even wipe out some of the capitalized interest you otherwise paid with your large payment using your refund! That actually pays your car off EARLIER, and with a lower total principal+interest than you ended up paying.

Daniel’s attitude also is indicative of the nanny-state mentality, which I abhor, that says, “Please, Almighty Government, save my money for me because I am so weak and helpless that I cannot save it myself.” Daniel, you’re smart enough to get on a blog like this and comment, so why can’t you do a little better for yourself>

Generally, I think it is over-argued that you could save the extra monthly gross income. People counter, “but I would spend that all anyway.” I say congratulations! Spend it! Spend that extra $400 a month to buy your expensive gas, your vacation, your shopping spree, etc. instead of borrow money on credit cards to do it! Spend the money you have NOW instead of spending someone else’s money (Visa/MC) and then paying them back at the end of the tax year.

Is Getting a Tax Refund Good or Bad?

[...] there’s an ongoing debate in the personal-finance world between people that think you shouldn’t get a refund and those [...]

Queercents » Blog Archive » Did you get a tax refund? 3 ways to make a windfall pay at tax time.

[...] easy to be precise so wouldn’t you rather get a tax refund than owe the government money. Even Ramit Sethi, now a New York Times bestselling author, agrees: First of all, if you end up owing the government [...]