Quick Tip: 5 Problems with Tax Refunds
One of my Twitter followers named Beth J. wanted to know why tax refunds get a bad rap because she feels excited about getting money back instead of owing tax. While getting a small refund that’s less than $100 isn’t a big deal, getting a large one means you should adjust your payroll withholding. Here are 5 problems with getting a tax refund:
1. You give up control. The average tax refund is close to $3,000, which comes out to $250 per month. It’s your hard-earned money—wouldn’t you rather have it in the bank so you can decide the best way to use it? Take back the power to save it, invest it, pay for emergency expenses, or pay down debt during the year by adjusting your withholding.
2. You don’t get interest. Unlike a bank, the government doesn’t pay interest when they have your money. If you put $250 a month in a savings account that earns 2%, you’d have an extra $27.65 at the end of the year. It’s not a ton of money—but it’s yours.
3. You lose an opportunity. The potential long-term investment return that could result from investing $250 per month is staggering. If you earn an average of 6% over 20 years, you’d end up with more than $115,000.
4. You’re apt to spend it. It can be awfully tempting to spend a lump sum tax refund on something that won’t improve your finances, like a vacation or a fancy TV.
5. You could lose tax benefits. Certain tax credits—like the Residential Energy Credit and the Saver’s Credit—are nonrefundable, meaning they can only reduce the amount of tax you owe to zero. In other words, you’re ineligible to claim several different tax credits when you already have tax money coming back!
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