Tax Refunds- The Good, The Bad and Why We Get One Anyways

Tax Refunds- The Good, The Bad and Why We Get One AnywaysFinancial experts along with many personal finance bloggers frown upon getting tax refunds. Why? They actually have a valid point—why loan the government free money when you can use it to your advantage? It makes sense. You could be using that extra money each paycheck to contribute to your retirement funds, invest, pay off debt or build up your emergency fund or other savings accounts.

Most of us would probably agree that the interest on savings accounts is pretty crappy right now; the same can be said for most CDs (certificates of deposit) as well. So by putting the money in savings, you’re not going to be making much money off the interest. Which is perfectly fine, making something is better than nothing.

I just don’t see it being that beneficial in our situation. We contribute money to our retirement; we recently increased our 401k contributions to 8% and plan to increase to 10% later this year. We put money into our Roth IRA, granted it’s not a lot, but $50 each month is better than nothing at all—we’re creating a habit. Our debt is almost eliminated, plus we have an Emergency Fund that we’re still adding money to each month. Overall though, we would only be seeing a take-home increase of around $100 with each paycheck if we adjusted our withholding.

Is an extra $100 per paycheck worth it? Not to us. We’ve gone down that road before, and I’ll tell you, it’s not worth the chance of owing taxes at the end of the year. That’s just one of the downside of having unpredictable income, you never know how things will turn out. I remember the one (and only) year we ended up owing taxes; it really sucked trying to scramble to get the money together. I prefer the stress-free approach to taxes, even if it’s not the best choice—it works for us.

Getting a large chunk of money back at once also has its benefits. We work pretty hard to keep our spending in check and like to take advantage of the tax refunds we receive when we efile. We’ve used them to pay off debt, beef up savings accounts, take vacations and for larger purchases that can be put off until tax time. This is just something that works for us, we know it’s not “free money,” but getting it in larger amounts can be more beneficial.

This year, we were planning to use our tax refund to spend a couple of weeks in Europe. Unfortunately, Honey was concerned that it wouldn’t be enough to feel financially comfortable. So instead, we will be heading to Denver for the Financial Blogger Conference and go to Europe next year. I guess my point is that normally (without tax refunds) going on a vacation to Europe isn’t something that would be within our grasp. Saving little bits of money here and there would make it feel like forever, even though we would eventually get there. Getting tax refunds gives us the ability to take advantage of more financial opportunities and do things in larger increments.

Tax refunds can be either bad or good, but I think it really depends on each person’s financial situation and their financial goals.

 

Do you get a tax refund?
Why or why not?

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About Jen Perkins

Likes: saving money, being debt free (aside from our house), zombies, travel, getting money, blogging and dogs. Dislikes: debt, being broke, bunnies, wasting money, not having enough money to travel the world and paying interest. Facebook  ♥  Twitter  ♥  Google+  ♥  RSS

Comments

Tax Refunds- The Good, The Bad and Why We Get One Anyways — 22 Comments

  1. Yes, we get a tax refund! I would much rather get a refund than to owe!! That’s the main reason, and also, I just really like getting that nice refund every year – we generally throw it into savings, it’s not like we depend on getting it to pay bills or whatever. But the main point is we don’t owe any taxes and thats a relief!

    • It really is comforting knowing we aren’t going to be responsible for paying taxes every year. Great job saving your tax refunds, not everybody is that disciplined. :-)

  2. I can see the benefits of the forced savings of a return, and also the low opportunity costs with 1% interest. In a future year, how about just putting it all into a savings account? $100 a week is a big amount over a year, and if we start to see 4-5% interest rates again you’ll feel better capturing the float than waiting until April to collect your money.

  3. I think the advice to avoid tax refunds is more important when you are either making more money or when you are in debt. When you’re in debt, you could save a lot by putting the extra $100/paycheck towards that debt. I miss getting tax refunds. Since I started making money online, I always have to pay money at tax time.

  4. Last year, my husband wasn’t working for 5 months so I changed my contributions. I don’t think we’ll owe anything, but I’m kind of nervous to find out. We’ve always gotten back a return though, and I plan on getting a hefty one next year! I’m with you, I don’t like having to worry about owing money.

    • Being out of work definitely constitutes a good reason to change up withholdings. Sorry about your nervousness this tax season. :-( I hope you guys don’t end up owing anything this year.

  5. My goal is to either receive a small refund or pay a small an=mount of tax. Keeping my refund small means I can increase other deductions for savings, investing or taking a trip.

  6. We generally get a refund. I’m self-employed as a writer, so I make sure my husband’s withholding is enough to cover my taxes as well. We also have rental property, and last year the one that I rebuilt ran at a loss, so I could deduct that too.

    I get tired of people getting on their high horses about tax refunds. If getting a refund works for you, then go for it.

    • You tell ‘em Harriet! :-)

      That’s a really smart move adjusting so that your taxes are all covered from your husband’s withholdings. Did you ever finish up your last proposal?

      • I did. It’s at publishing houses now and I hope someone will buy it! I’m working on the book due in August so I’m super-busy. Also trying to get my son graduated from high school and into college and my body thinner. And my husband’s been gone a lot for work.

        BUT: the septic tank is finally finished!!!!!! I know you were on the edge of your seat about that!

        • lmao. At least the septic tank is finally done. :-) I hope someone will buy it too, I’m crossing my fingers for you. It sounds like you’ve got a ton of stuff going on right now, good luck. :-)

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