Are you getting a tax refund this year? The answer is probably yes because the IRS says that most taxpayers do get money back each year. Sadly, that is not the answer financial advisors like myself want to hear. Why? Because that means you just loaned the government money interest-free. The federal government had your money to do with as they pleased without giving you any benefit. How do you feel now? Probably worse. You could have been doing other things with that money all year long.
According to a Bankrate Money Pulse poll, though, more than half of Americans would prefer to get a refund then breaking even or owing a little to Uncle Sam. And only 27% of you would want to hit the perfect mark of not owing money and not getting a refund. Some of this may be out of caution because dealing with taxes and the IRS can be difficult, but I have another suspicion:
Poor Cash Management
I think that many of you would rather receive that refund because it is a way of forced savings. If the government is holding your money, you can’t touch it. There is no way for you to splurge on that Caribbean vacation or new red Mazda Miata. Yes, the interest rates on things like savings accounts are low, but at least in an emergency you can access that money. Putting Uncle Sam in charge of your savings is not smart cash management. Forced savings is not a good excuse. There is no excuse for improper planning. From a financial perspective, the reality is that it’s an inefficient, inferior way to save.
What will you do with your refund?
Some of you will receive a tax refund though and you should be smart about what you do with it. I like hearing that some of you are going to use your tax refund to pay down debt. Some of you will add it to savings or invest it and other will use it on necessities such as groceries or utility bills. The downside to waiting for the refund to pay down debt is that interest charges on debt grow and you may not get the refund you expect or may encounter delays in the IRS processing your return. It is not a good debt management strategy because there are too many things left to chance.
What can I do about it?
- Talk with a financial advisor and tax advisor to have them evaluate your situation.
- Understand the trade-offs between receiving a tax refund and not receiving one.
- Work with the professionals to determine what tax planning strategies might be beneficial to you. It might be as simple as adjusting withholding on your W-4.
The ideal situation is for you to receive no tax refund and owe no taxes, but that can be difficult to accomplish. I get it. Taxes are complicated. But, now that you know what a large tax refund really means, look at your own situation and do your planning. I don’t think any of us want Uncle Sam making the choices about what to do with our money.
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