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Your parents are delusional about tax refunds

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I love tax time because all these kooky weirdos come out of the woodwork — including personal-finance “experts” who don’t know what they’re talking about.

These are the people who will get on TV, or on their online soapbox, and lecture you about taxes. One of their favorite go-tos is this old chestnut:

“If you’re getting a tax refund, you’re giving the government free money!”

What they mean is that you should not be getting a refund, because if you are, the government has been sitting on your money and earning interest for the entire year.

Let me break this down for you.

The average tax refund is about $3,000.

How much interest are you losing if you get a tax refund? $2.50 per month. Yes, you read that right. Two dollars and fifty cents a month. I have that much money in my shoe right now.

What’s more, if you’d had that money, you almost certainly would have spent it.

On the other hand, if you get a tax refund, Americans are more likely to pay off debt and save it.

This is a perfect example of “experts” missing the forest for the trees.

Yes, Mr/Mrs. Expert, mathematically, you should pay the government as little as possible during the year and earn interest on that money for yourself.

However, there are 3 problems with your advice:
1. Your advice is totally unrealistic as Americans spend whatever they have
2. Americans don’t understand withholding, despite your repeated exhortations to “change your withholding!” Perhaps you don’t realize that those words sound like COMPLETE GIBBERISH (why personal-finance education is overrated)
3. Most people would rather get money back than pay it — numbers be damned

So why do these “experts” continue promulgating the same, tired old advice that never changes behavior?

Because they can rap ad nauseum about what we “should” do with our money…but they fail to understand the psychology of what we ACTUALLY do.

I went on PBS’s Nightly Business Report to share this perspective. Check out the video:

Watch the full episode. See more Nightly Business Report.

Note: During filming, the cameraman was like, “Um…do you want to button one more button up?” I tried it and muttered, “This goddamn button adds 10 years” so I removed it. Then the other cameraman made a crack about how many viewer emails they were going to get about me and my shirt. However, I think their average viewer age is in their 60s, and I am not popular w/cougars.

Ok, back to tax returns. The reason for the title of this post (“Your parents are delusional about tax refunds”)?

Because in many households, there is a mom or dad who has some of the kookiest ideas about taxes, sitting there in an old, dusty recliner, spouting off uninformed nonsense about the government and tax rates. Once you’ve heard something enough times — and “getting a tax refund is BAD!” is one of the more innocent ones — you start to believe it.

So send this article to your parents and 3 friends. See what they say. Leave a comment with their responses.

This is just another example of a counter-intuitive money lesson you’ll find on I Will Teach You To Be Rich.

Remember — personal finance is AT LEAST 50% about psychology.

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90 Comments

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  1. It can be a little dangerous to have your state owe you money. You may not get it right away, especially if the state is having budget problems. California comes to mind here.

    If you’re counting on the refund arriving at a certain point, this could be a bad thing.

    And do people really do mostly responsible things with their refund? Anecdotally, the people I know blow it.

    This could be a case of six of a dozen, half of another, if they would otherwise blow that portion of their paycheck proportionately when they got paid.

    I just wrote a check for our local tax, due tomorrow. I calculate the 1.4% I owe and put it in my savings account each month. It’s growing a small bit of interest and it’s not being frittered away. And it’s there when I need to pay up.

  2. I mentioned this to my parents on Tuesday at dinner with them, and they were happy to receive a $5000 refund, despite my annoyances at an interest-free loan to the government. I’ve also had a similar discussion with my friends at work, some were happy to get the refund, others share my belief that it is better to owe the government money.

    I agree with your points for the general population. However, my friends and my parents are not like the general population. The people I spoke to carry no credit card debt, save a substantial portion of their income, and own houses they can easily afford (or in my parents’ case, have paid off their house). Thus, we would have saved our $2.50/month. This is really more about general principle of not wanting to give the government money it doesn’t deserve rather than having the extra $30.

    I do agree with your psychology angle. I have a warm feeling about getting money back, despite that it was always mine and I should have had it all along. I’m actively working to break myself of this incorrect gut response.

  3. Ramit;

    This is a great post. I actually use my family’s taxes to increase our savings rate. My husband is an awful saver, and tends to spend most of what is left in his accounts after his half of the bills are paid. I’m the saver, and so am in charge of our investments and our liquid fund. I’ve always had him *increase* his withholding when he’s started new jobs. He forgets he’s paying more of our tax bill (especially since I also do our taxes). When our fat refund comes in February, he gets a little fun money, and I roll the rest into our IRA and house fund. This way, we both pay half the bills, and both save almost the same amount of money over the course of the year, without any arguments.

    :) A.

  4. wrt point 2. If you change the way you frame the benefit, people see the value of changing their withholdings.

    i.e. “Want to get an extra $100 on all your paycheques?” (3k spread out over semi-monthly paycheques)

    The answer tends to be ‘Yes.’

    Personally, I’m happier getting the money up front. (per point 3, I do prefer to get money rather than pay it out — on each paycheque.)

  5. Thanks to all of the available deductions I’ve half a mind to say that it’d be stupid not to get a refund every year, even if your withholding figures are perfect. Just like negotiating your bills over the phone, it’s worth taking a bit of time to look into what expenses you can claim when you file, because the payoff can be significant.

    Speaking of tax myths, it’s amazing how many people will pay for a professional tax preparer when they have simple returns, all because of fear. I’m no professional, but I’ve been helping friends and family out with filing their returns online, and after asking around it’s obvious that these people are definitely not paying for professional advice.

    One would think that because filing online is so quick, convenient, fool-proof and cheap that it would be the logical choice. Wrong! People don’t want their dusty shoebox packed with receipts to remind them of their spending habits, and they’re willing to pay dearly for someone to hold their hand and assuage them of their fears of the Tax Men and the ever-dreaded AUDIT. (gasp!)

    • Hey Freebooter,

      You are so right. I did work for tax preparer for a season. And when you go online, you are accessing the same program I was working from. The only different is online it is about $30, at the service over $100 and way up. I do help my relatives and friends now. ( for free.) The only people that should use a tax service are ones with businesses and odd incomes.

    • I used to do my own taxes and would love to go back to it, but we have money in investments and such all over the place, I do independent contract work, etc. Back a few years, I really enjoyed doing my own taxes – it was interesting and easy enough with all the software around. Enjoyed it a lot more than paying $500 for tax prep! (Admittedly, though, our tax preparer is THE MAN.)

    • People pay for a tax preparer or a CPA because, unlike you, the CPA has generally gone through years of education and training, knows tax law and thoroughly understands how to prepare a tax return. I’m a CPA, and probably 50-60% of the returns we see that were self prepared have errors. Anybody with an ounce of intelligence would know they should go to a tax professional for tax advice, not Joe-Blow neighbor/nephew/friend who says he knows how to use TurboTax and will help them “save money”.

  6. Gabor Javorszky Link to this comment

    I don’t get it. A tax refund is something you get back when you have paid too much to the government (for whatever reason). How can reciving extra money (often out of the blue) be BAD?

    I’m just waiting for my P60 form (I’m in the UK), then I’ll ship the whole bunch of papers to my accountant. Before I blindly do that, I did my research on HM Revenue and Customs site, and made a neat excel sheet out of it. Comparing that with my last payslip, the government owes me about £800. Saving it!

  7. I think Ramit is hanging out with the wrong cougars….

  8. My sister and mother are happy with their tax returns – they usually accomplish a financial goal (pay off a credit card or save for emergencies) and have fun with the rest. Having it in a lump sum has been helpful.

    I was really happy that my mom creatively used her refund this year to go ahead and finish converting a portion of her place for an apartment. She now collects some extra income every month. Better return than $2.50/month for her.

  9. funny but true . . . to Amy’s point, it’s a great way to force savings through the back-door for someone not so disciplined. personally, I’d rather manage my withholdings and get the least back as possible at year end

  10. You should have shaken the change out of your shoe on-air. Way to tone it down for the old folks!

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