A little over 50 percent of Americans expect to receive tax refunds annually. Most of those people look forward to the refund. They expect to use the “extra” money to pay off debt, improve their homes, take a vacation, or simply put it in the bank so they can have a larger financial cushion.
If thinking about your upcoming tax refund puts a smile on your face, then you need to learn these three reasons why you don’t want a tax refund. Sound surprising? It makes a lot of sense when you think about how you could have used that money during the year instead of waiting until tax time to get your withholdings back.
You Lost Money That You Could Have Invested
If you get a tax refund, it means you overpaid the government last year. Big deal, right? They give the money back, and if you’re lucky, you get a nice chunk of change all at once.
While a refund sounds like a great idea, think about what you could have done with that money if you were able to hold onto it during the year. Even putting it in a low-interest savings account would have yielded some profit. Instead, you have essentially been putting money into a no-interest account that you cannot even access when you need money. This is one of the primary reasons why you should avoid a tax refund.
You Have Been Giving the Government an Interest-Free Loan All Year
Since you haven’t been earning interest on your withholdings, your money has been serving as an interest-free loan for the government all year.
Government withholdings don’t sit idly in an account. The government uses that money to pay its own expenses. It makes sense for the government to go ahead and use the money that you actually owe, but no other institution would get to use extra money for free.
The amount of money that you get back from your taxes is extra money that the government got to use, for a brief period, without paying you any interest. When’s the last time you got to borrow money for free?
You Paid More Money in Interest Than You Should Have
Okay, so you didn’t earn any interest because you overpaid the government. If you put that money in a savings account, you probably would have only earned a few dollars, anyway so once again, you may be wondering why it matters!
The fact that a few hundred dollars or even a couple thousand dollars would have only earned you a few dollars interest over the course of the year assumes that you would have used the money to increase your savings rather than reduce your debts. If you have any debts at all (credit card, student loans, and home loans included), you could have used your tax refund money last year to lower the amount of debt you owe, and therefore save interest on your debt payments. By giving the government extra money, you paid more in interest on your debt because you had to wait for your refund to come back to you instead of paying earlier in the year.
Loans have much higher interest rates than savings accounts. Your credit card might charge you a 20 percent interest rate every month. Even if you only get a few hundred dollars back from the government in a tax refund, you could have used that money to reduce your principal debt and significantly lower the amount of money that you paid in interest. That’s pretty ironic since 30 percent of people who expect tax refunds plan to use the money to pay down their debts.
Overpaying is a Bad Idea
If you receive a large tax refund, you should adjust your withholdings. That way, you give less money to the government throughout the year. You don’t get a big refund, but you do get to keep your money so you can do something more effective with it. No matter what you do with the money, overpaying your taxes and waiting for a refund is a bad idea.
Debbie Dragon provides content for www.BackTaxesHelp.com, a website that strives to help individuals who are struggling to pay back taxes and provide them with tax solutions.