“If you get a tax refund, you just gave the government an interest-free loan!” I seriously can’t count how many times I’ve heard people say some variation of that phrase. You’ve heard it, too (or maybe you’re the one that said it to me). It’s technically true. But obviously people who say this really haven’t run any math on that to see how insignificant the interest can be nor have they considered any other implications.
Let’s examine the impact that going a year without my refund had on my finances this year. I received a tax refund of $900 for 2010. Assuming that I placed an equal portion of this each month (which is $75) into a savings account each month and my deposits earned a generous 1.5% APY (note: I currently get 1.0% on ING), I would have earned a whopping $7 of interest by the end of the year (which is, ahem, taxable). Geez, looks like one less burrito at Chipotle this year.
Math aside, you could also point out that you had to wait to get the rest of your money, interest or not. The $900 is sorta a big deal to me (it’s currently almost a full month’s pay). But what if I screwed up my withholding and I suddenly owed $900 in taxes? This can easily happen if you get a big pay raise mid-year or change your allowances on your W-4. As Ramit Sethi points out, many who would owe this amount of money at tax time wouldn’t have the cash to pay their taxes. This would definitely put a strain on my finances. There’s potential to create a real mess with the IRS and that’s far more of a pain than whatever reward that would .
Moving on from interest and waiting, it’s just plain fun to get a bunch of cash all of a sudden that you didn’t really have to do anything more to earn. I don’t plan ahead for when I get my tax refund, and I don’t know how much it’s going to be. But when I get the refund, I treat it a bit like a reward (while still being careful how I save/spend it). This lump sum is much more beneficial to me. I obviously survived the year without that $900. If that $900 had been spread over every paycheck, that would’ve only been an extra $35. I would’ve easily squandered that on one or two meals at a restaurant. But by getting the refund as a single, large payment, I can do something much more significant with it.
This year, my refund (after I added to my emergency fund) covered my airfare to my upcoming trip to Spain. There’s not any other easy way I could have come up with this amount of cash by trying to save or skimp throughout the year.
While it is fun to get one, I’m definitely not suggesting you just squander it. I really like knowing that I have money that I can just put into savings or other places that I can’t always afford.
Perhaps there’s something meaningful that you pay for, too. You could use your refund to tackle credit card debt. Throwing a few thousand on that fire could go a long way. Either way, I hope the tax refund haters out there will get over all the “free government loan” fussing.
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photo by: Infrogmation
I’ve prepared and filed my taxes without the help of an accountant since I was 18 years old. At first, I was intimidated into thinking that it was a complicated process and that I needed outside help to figure it out. Then, I was lured in by Tax Slayer web-based tax preparation software (note: I am not paid a dime by Tax Slayer, I’m just a happy user). I’ve been using it for more than five years now, and I keep going back. In fact, many people are doing the same with a variety of e-filing software. For tax returns filed in 2010, about