Tax Refunds: the Bigger the Better

A couple of years ago I wrote about how after 30 years in the tax prep business I still believe that tax refunds are a good thing if not one of the best of things in the tax world. Getting a big tax refund feels better than being two steps ahead of the parking enforcement officer or seeing the person who "nudged" you out of the fast lane being pulled over.

Academics, finance professionals, actuaries, daytime talk show hosts, and many others disagree with me - they believe tax refunds are bad and they let me know loud and often. Many of them think a tax refund is bad because it means you made the government an interest free loan when you could have been using the money. Nevertheless, I'm a realist and most people aren't budgeting the way they should and they definitely aren't saving the way, or as much as, they should. Therefore, I maintain tax refunds are a great thing and are an alternate method of budgeting and saving for a majority of Americans.

The American savings situation is so serious that the U.S. Consumer Financial Protection Bureau has asked tax preparers to help encourage taxpayers to save at least part of their refund. In an article, Millennials Are Outpacing Everyone in Retirement Savings, Time reported that 45% of Americans, up from 38% last year, were prepared for retirement. However, despite that jump, 55% do not have the savings they should for retirement according to an ongoing Fidelity study that also reports that general saving is hard for most people. So being on the receiving end of a tax refund is like a forced savings plan. And, I say it's even better getting it all at once so you have choices and options for where to spend, how to spend, and how much to save.

Keep in mind, last year; over 100 million taxpayers got an average tax refund of about $3,000. Not only did most of these folks get a healthy tax refund, they have done so for years. In fact, nearly three out of four taxpayers got a BIG refund for the past 10 years. Can so many Americans be making a bad decision each and every year? Hardly! Take this short quiz. When you file your tax return, would you prefer:

  1. To owe $3,000. Good news, you had that money all year. Yay you!

  • To owe nothing. You somehow had exactly the right income and withholding so you don't get a refund, but you don't owe either. Good news, you beat the odds by achieving this delicate balance. A win for you?
  • To get a BIG refund!! The government held your money all year - that's the extent of the bad news. Good news, they'll return that to you now. How does $3,000 - the average refund - sound?
  • What was your answer? I use this situation with someone every year and it makes it a bit more concrete for most. For me, the answer is I want a refund. The bigger the better; I'll invest it wisely and spend it appropriately. Those folks that tell me how wrong I am don't make me feel dumb or guilty. I know I'm in good company with the other 100 million plus Americans getting a big refund this year and every year. Although, I bet most of those naysayers get a refund too, they just don't want everyone else to know. But, it doesn't matter what I, or the others think, it's your money - it only matters what you think.

    If you do get a refund, follow the advice from the experts at Time, "power up your savings by freeing up cash and taking advantage of windfalls." Windfalls like a tax refund. If you aren't sure where to direct your savings, use some of the tips that the U.S. Consumer Financial Protection Bureau has made available on their web site or seek the assistance of a financial expert.

    If you did pick answer 1 or 2 in my quiz (or if you like the idea of getting less back or owing the IRS at tax time), then talk with your tax pro so you can adjust your withholding or pay less in estimated taxes.
    At the end of the day in 30 years of tax preparation, I have not had a client say to me "Hey thanks Mark, I owe $3,000 but had that money to use all year. It is your money; enjoy it and spend it wisely.