Get my 5-day email funnel that generated $400,000 from a single launch

Want an email sales funnel that's already proven to work? Get the entire word-for-word email funnel that generated $400,000 from a single launch and apply it to your own business.

Yes! Send me the funnel now
Start Here: “The Ultimate Guide to Personal Finance”

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

54 Comments- Get free updates of new posts here

13 1

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.

* * *

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.

* * *

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

13 1

Related Articles

Untitled design (6)

How to pay off student loans without thinking about it

Student loans are a big kick in the face that the real world has arrived. The average graduate has $28,...

Read More
stretching

The 4 keys to finding ambition

We’re told we should just be happy with what we have… but there’s a difference between being happy ...

Read More

54 Comments

13 1
 

Leave a Reply

54 Comments on "Why you should be happy to get a tax refund, not guilty"

Notify of
avatar

Sort by:   newest | oldest
Meg
Meg
8 years 3 months ago
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… Read more »
Vered@MomGrind
8 years 3 months ago

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.

Colin
Colin
8 years 3 months ago
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… Read more »
jspin77
jspin77
8 years 3 months ago
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… Read more »
RT
RT
8 years 3 months ago

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.

Daniel
8 years 3 months ago
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… Read more »
Tim
Tim
8 years 3 months ago

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…

Chief Family Officer
8 years 3 months ago

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

Adam
Adam
8 years 3 months ago

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.

Sammer
Sammer
8 years 3 months ago
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… Read more »
aa
aa
8 years 3 months ago

Smart people owe or get a little back (few hundreds max).

Dumb people get $1,000+ back and still feel they’re smart or lucky.

What about the USA Today poll? That indeed reflects most Americans are financial dummies.

Carlin
Carlin
8 years 3 months ago

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
steve
8 years 3 months ago

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

Praveen
Praveen
8 years 3 months ago
Ramit, I think the “most people” you are talking about refers to a different type of audience: students? people who don’t know basic tax stuff? What kind of AGIs we are talking about here? 600$ doesn’t seem much. But for people getting a fat 2000$-3000$ refund it definitely makes a difference! I mean, that extra few hundred dollars goes a long way in paying for you gas bills, auto insurance, utilities, DVD subscriptions etc. Take your pick! In 2006 I got a fat refund and I was pissed off. This year I sat down and calculated how much I was… Read more »
Jack Payne
8 years 3 months ago

Interesting “take” on the refund.

Fiscal Musings
8 years 3 months ago

I understand that “most people” wouldn’t be responsible with the extra money each month, but does that mean that they shouldn’t? People should just give in to their irrationality and laziness? This doesn’t seem like something that would be espoused from a site titled, I Will Teach You To Be Rich.

I thought you wanted to teach sound financial principles, not tell everyone that it’s OK to be financially irresponsible just because most people are.

naveedsmind
8 years 3 months ago
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… Read more »
Igor L
Igor L
8 years 3 months ago

First of all the IRS IS NOT THE GOVERNMENT it is a PRIVATE company that is contracted/friends with the government thus its a private company making some money off of you to (pay their workers?)
getting a tax return of I dunno… XXXX$ or whatever random number you can think of is a reward and not some kind of a loss.

most people suck at taxes thus they get less back, and lets say you are good at taxes… you get more on average, thus putting you on top of the food chain, feeling better?

Nathan
Nathan
8 years 3 months ago
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… Read more »
Baumsie
8 years 3 months ago
I would have to disagree here slightly. My reason is that the people who are “tax-savvy” enough to take additional allowances on his/her paychecks in order to break-even or even owe the tax man money are the types of people who do save/invest money regularly and understand that owing money isn’t a bad thing if it’s done this way. So, if you are that type of person doing this, then you would have money to pay if you needed to. That is an assumption, but one i feel comfortable making. The people who don’t know to do this are the… Read more »
AJ
AJ
8 years 3 months ago
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… Read more »
Chris
Chris
8 years 3 months ago
Rammit, instead of “arguing that the technically smart choice (to not get a large refund) is not the correct one for most people, because they won’t save/invest that money if they get it each month”, why don’t you argue for people to be smart and save their money for taxes! With an envelope system like you’re very recently described in your post, one can effectively do the exact same thing as paying taxes, but make a lot more money from interest. If there were no penalties for significantly underpaying taxes, here is what I would do: Have 0 taxes withdrawn… Read more »
Rich
Rich
8 years 3 months ago

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.

Jesse
8 years 3 months ago

I love the comments on here. How many of the people who argue that they’re throwing away money to the government wait until 1 day too late to return their movies and cost themselves 10 bucks, effectively all of the interest from that 600 in the bank for the year…

Gousalya
Gousalya
8 years 3 months ago

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

Tyler
8 years 3 months ago

If you have passive income that you are required to withold income and send it in quarterly, underpaying can be quite bad..

From your perspective I guess you would say that if I am getting back $600 in one lump sum the government helped me save a sum of money?

I can see how that makes sense. I am having my money direct deposited into my investment account.. If I was making more each paycheck I might have just subconciously raised my expenditures..

Neal
8 years 3 months ago

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.

Baz L
8 years 3 months ago
Consider this: I have a friend who purposefully doesn’t claim anything on her W2 (not even herself). And come April is excited about her $5000 refund. What do you call that. Apparently she shares the same values as Daniel above who finds the IRS as a “convenient savings vehicle”. I’m sorry, that’s just retarded. Let’s call it what it is. Hey, I’m not saying that I’d want to owe. I’d rather break even actually. I don’t know the first thing about taxes, but we’re talking about filling out a W2. I totally understand your point, but the reality is it’s… Read more »
Aaron S
Aaron S
8 years 3 months ago

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.

David
David
5 months 18 days ago

And if they is invested in a tax deferred retirement account, it reduces the tax burden even more…

Kirk
8 years 3 months ago
I totally disagree here. Too many folks I know use the tax refund as a savings vehicle. Rather than the meager $600 refund, they get $3,000 or more. Then they take a vacation and/or pay down debt, usually high interest credit card debt. When I say something to folks about this, they say that if they received the money during the year they would spend it. What a lame excuse. You can set up an auto bank draft to your credit card or to a retirement plan – even another bank account. Think of the savings if you pay off… Read more »
Denise Fisher
Denise Fisher
8 years 3 months ago
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… Read more »
Misty's Mom
Misty's Mom
8 years 3 months ago

What you are really saying is “I am an idiot about money” when you brag that you are getting lots of money back from taxes. When was being an idiot something of which to be proud? If you are unconscious about your money, how else are you unconscious and just letting things you can be in control of bull-doze over you unchecked?

Writer's Coin
8 years 3 months ago

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??

Kat
Kat
8 years 3 months ago
I owe every year. I try very hard to break even, but I am self employed and my wages are not set in stone. I don’t mind paying, as I keep a seperate savings account for my quarterly and year end taxes. Before that I used the envelope system. It isn’t hard to save for either. Basic math allows you to figure out what you might end up paying and you can plan for it. I have a dear friend who got back 6k this year and is excited about it and adjusted her and her future husbands withholdings to… Read more »
Josh
Josh
8 years 3 months ago
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.… Read more »
noel
noel
8 years 3 months ago

The thing that makes me laugh is when people say “Oh I only paid $600.00 in taxes this year!” Wrong! You paid what you withheld, plus that 600 dollars.

When I was young I loved the larger returns, seems I could never save that much month to month through the year. That nice check was my way of saving. Now that I have an established savings and have little debt (my home and 2 cars), I favor not getting a return but trying to lower my overall income tax paid year to year.

trackback
8 years 3 months ago

[…] 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 […]

trackback

[…] written about Iwillteachyoutoberich.com before, but last week I read another one of those posts where I’m just like, “Ramit, this is why you are the […]

Spears
Spears
8 years 3 months ago
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… Read more »
Erik
8 years 3 months ago
I agree that it’s too hard to estimate your taxes to the final dollar, because you never know what credits and deductions you’ll qualify for until the end of the year. However, I think the bigger problem with receiving a big refund from your taxes isn’t the interest that you give away to the government, but the fact that many people could have used the extra money throughout the year rather than getting it in a lump sum in April. I think people would be more tempted to use that lump sum on something they don’t need rather than if… Read more »
Kelli Myers
8 years 3 months ago

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.

trackback

[…] Getting a tax refund is better than having to pay. It’s a greater hardship for most of us to have to pay something we weren’t expecting, than to give a small interest-free loan to the government. (Why you should be happy to get a tax refund, not guilty) […]

Warren
Warren
8 years 2 months ago
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… Read more »
sow
8 years 1 month ago
I wrote an article pertaining to this subject on my blog (http://www.stewardsofwealth.com/?p=10). I agree that it’s better to have a tax bill than a tax refund. And the author even states that this is “technically correct.” But, he goes on to say that people would rather have a refund because they’re poor money managers and wouldn’t have the dough when the time came. Therein lies the problem. The reason why I like paying later is because i have control over the money. I can invest it, keep it safe, and keep it liquid to me if I ever needed to… Read more »
trackback

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

jenni
jenni
7 years 4 months ago

I don’t agree with you at all! Even at $600, if you have a 401K at work where your job matches you could have had $100 extra a month put into your 401K ($50 from your contribution and $50 from your company’s match). That is an extra $1,200 at the end of the year. Much more than $600. And I who personally do taxes for a living see people getting $5K+ back. Just not smart in my opinion.

trackback

[…] 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 […]

trackback

[…] We tend to call a decision “rational” when it is farther down the logic chain, and we care about it only indirectly. For instance, Ramit Sethi asks in comment 13 of his post on tax refunds: […]

tandem paragliding
5 months 23 days ago

Greetings, I do believe your website may be having internet browser compatibility issues.
Whenever I take a look at your web site in Safari,
it looks fine but when opening in IE, it’s got some
overlapping issues. I just wanted to give you a quick heads up!
Aside from that, wonderful blog!

Jason
Jason
5 months 14 days ago

The IRS isn’t keeping just your $600 they are keeping millions of peoples money which if combined I’m sure is a lot of money. Your right, most people won’t be losing a lot but the IRS is making a fortune off all the money they hold I would guess. Think about it, they aren’t holding just your $600 they are holding millions if not billions of dollars. When you invest on that scale, the returns are a lot larger. I think it’s wrong that they can make a fortune off the backs of taxpayers who overpay.

skyler
skyler
5 months 14 hours ago

My family and I were fortunate enough to receive a large refund this year due to me having a disability throughout the year. We made one spontaneous splurge purchase and then paid our mortgage, utilities ect for the whole year. I know I could have put it into investments to earn a little but the temptation of having it could lead to irrational decisions. I feel this was a smart decision with the extra $ and now what we make a month can now go into savings.

Aaron
Aaron
3 months 17 days ago
OKAY…., excuse my LOL…who wrote this? J.D. Roth of Get Rich Slowly? Ramit Sethi? “Technically, they’re right. I live in a world of reality, however, which means that “technically” isn’t always correct.” When it comes to your money and how to save it and spend it, “technically” it should always be correct. “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.” It may seem like a small amount of money to some people, but it’s money! And it adds up,… Read more »
wpDiscuz