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 ING 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.
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.