Debunking the myth that tax refunds are bad for you

[sweeps]

I think the author has a point here. The majority of people out there are bad at saving. So having the government hold a chunk of their money (even at 0% interest) is better than them spending it frivolously throughout the year.

Link

[vsjhoc]

The problem with this theory is that many people who receive large income tax refunds don't save them. They spend the money on the bills that they accumulated during the year because they didn't have the cash flow to pay because they had too much tax taken out ...

[sweeps]

They spend the money on the bills that they accumulated during the year because they didn't have the cash flow to pay because they had too much tax taken out ...

LOL. Point taken.

[vsjhoc]

LOL. Point taken.

Unfortunately I wasn't trying to be funny. It's the sad truth for a lot of folks.

[tabbycat31]

As a tax preparer, I had clients ask me about changing withholdings all the time (I had a book taht listed paycheck amounts and how much would be taken out per paycheck...... fed income tax only, not state or FICA tax). I told them that if they are disciplined to save that extra $20/paycheck and not fritter it away, by all means go for it.

Unfortuantely in the real world, most people would fritter away that $$. And when a client uses a tax refund to fund an IRA, then there's no complaining about getting the refund in the first place.

[poundwise]

I'll never be convinced that giving extra money to the government in the form of overpaying taxes is a good idea, period.

As for those who blow money throughout the year and claim to do well by having a nice-sized refund at tax-time; what exactly do they (the vast majority of the time) do with the money when they get it then? You got it. Blow it.

The real conclusion IMO is that for those who manage their money, it is far better to pay the appropriate amount of taxes throughout the year and have a minimal refund and for those who don't manage their money, it doesn't really matter.

I'm sure there are exceptions.

I think its laughable that people have to be "tricked" or trick themselves into saving. As if that is going to make a life-changing difference. The BOA offer to give you back your own change from your debit card use to your (virtually nil interest) savings is an example of this. This and purposefully looking to a substantial tax refund to "provide" something of benefit, is just flat-out lame.

[sweeps]

I think its laughable that people have to be "tricked" or trick themselves into saving.

I hear what you're saying, poundwise, but the fact is bad habits can be very hard to break. Sometimes people have to do things to trick themselves to break free from those habits and get into better ones.

[tabbycat31]

Another reason taht people can get big refunds is because of EIC. Sure you can get that in advance, but it's only about 1/3 of what you will get at tax time.

I Personally claim single 0 on my W-4 form, but that's just me. I've never had just one job during the year, and I'm expecting self employment income, so I want myself covered.

A lot of these financial gurus say things in very black and white terms (especially when it comes to this issue). I always told my clients 'there's no right or wrong way to do it (unless you're hit with penalties), it's all a matter of personal preference"

I've also seen clients who claim way higher on their w-4 only to owe Uncle Sam 5 figures.

[poundwise]

I hear what you're saying, poundwise, but the fact is bad habits can be very hard to break. Sometimes people have to do things to trick themselves to break free from those habits and get into better ones.

Yes, I understand this. Anyone who has become determined with a budget, serious about a diet, devoted to a self-adjustment (quit smoking, stop using bad language), etc. knows the pains of eliminating old habits and developing new ones. And, yes, sometimes little "tricks" or small adjustments are the best way to larger successes.

Unfortunately, the habit encouraged by the BOA deal I referred to is more spending. After all, the way to get more "change" is to use the debit card more. (Which, of course, is what BOA is looking for.) Using the debit card in this manner, and passively to boot, is a sure prelude to overspending; unrealized (initially) and justified (ultimately) - especially when you consider that this appeals primarily to people who (a) do not keep up with their debit card use to the penny anyway, (b) are admitting that they don't save on their own to start with.

Purposefully planning to let your employer deduct too much from your check each pay period so that you will have a larger tax refund is much the same. What exactly are you developing here? Its not long-term thinking. Its not financial accuracy. Its not a saving habit. In fact, it is a surrender. "I'm not going to save it myself, so I'll let Uncle Sam collect it for me and then I'll get it back from him later."

While things like these may make people feel good, they do not, in reality, stand-up as good planning when actual math is applied and real logic applied.

Math and logic say that it is best to pay the proper amount of taxes. That is, don't over-withhold. Why? Because, (a) you ought to be using your income against a planned and purposeful budget, including savings, or (b) even if you're not, you could at least change the withholding and put the realized difference into a savings account. At the end of the tax period you would have exactly the same amount of money as you would have received as a refund PLUS interest.

The only reason not to do so is, "That doesn't work for me. I prefer to get a lump sum from the government." Which is another way of saying, "I won't handle my own money well or rightly."

Of course, this is all IMO.

I just happen to be right.

[greedy4chips]

I agree completely with poundwise!

It baffles me now that I have converted from the big refund ways I thought was so wonderful in the past. We used to get $9k/year from uncle sammy and I was delighted to do my taxes asap.

If I lacked spending discipline then the refund would be my bailout, perhaps as long as I didn't overspend it.

Have money taken from your paycheck and deposited into a savings acct with a decent interest rate and you still have your money if needed. Biggest benefit is you don't have to wait until late winter to access your emergency fund, because that is how many people treat the refund. It is an emergency fund to pay off debt accumulated throughout the year.

[Broken Arrow]

The only thing I want to say is that, even if Uncle Sam or anyone else holds the money for people, some will still spend their refunds frivolously.

I say this because what's what my ex and I used to do. Ahem.

But I know better now!

[Aleta]

I agree that it is not the best decision to let Uncle Sam hold your money all year long, but for some people that is the best decision for them at that time. Some people are not deciplined enough to put that money to the side. As was said, they will spend it as it comes in and will probably do the same when the big refund check comes in.

When my husband and I were younger, we had Universal cash-value life insurance. Do you think that that was a wise choice? No, but at that time, our insurance agent knew that we were saving very little money and was not contributing the maximum to our ira's. Some years down the road when we had more knowledge about finances, we cashed it in and invested the cash part. We switched to term-life insurance which made more sense for us. So, that life insurance policy became like a savings for us and thankfully, we were able to see the benefits of investing it wisely and adding to it everymonth.

That's why one shoe doesn't fit all. Each person is at a different stage in their understanding of money and sometimes having people hold our money saves us from ourselves.