Do you traditionally receive income tax refunds? There are many people who wait in great anticipation to find out how much there income tax refund is going to be each year. To them it is newly found money similar to receiving a bonus check. But in actuality, its earned money delayed in delivery.
Is an income tax refund bad?
In “3 Reasons Why a Big Income Tax Refund Is a Horrible Thing” Craig Ford, explains three reasons why a big tax income refund is a bad idea:
- A big tax return simply means you did not properly calculate and estimate your taxes
- A big tax return means that you let the government hold your money for up to 16 months. By the way, the government did not give you any interest on that money.
- We think psychologically different about found money than earned money.
I enjoyed Craig’s post and particularly the conversation that took place in the comments section. As an aside, I love reading blog posts such as this one with the valued added comments from all the different perspectives (FYI – this type of discussion displays the true value of a blog).
Is an income tax refund good?
It was an interesting read because like Craig it’s been ingrained in my head to avoid income tax refunds like the plague. But as you would find in the comments of Craig’s post there are a lot of people who are fine with receiving a refund.
Here are a few of the reasons I picked up from the comments as to why an income tax refund might not be such a bad thing for some people:
- The interest I could earn myself each year on the money is minimal. Unless you’re withholding too much it may not make a difference.
- I’m concerned with making a mistake and owing at the end of the year, so no changes in allowances are made. It’s too confusing to change anything.
- I’m much more likely to do something wise with a large refund than receiving the money in monthly installments.
To the further the point on the last bullet, I read an article by Financial Samurai on why tax refunds are good for most people because people can’t save. He dares to go where many have not been willing to go in discussing the very idea why he thinks income tax refunds are actually not a bad thing. Here’s why:
You have to ask yourself whether you have the discipline of saving that extra $200 a month, or using it to pay down debt. Most people are not disciplined enough to pay down debt and avoid buying junk. This is why we have such massive debt problems in the first place!
Because of this reason, Samurai thinks it’s better for people to get an income tax refund. He believes people will manage a larger sum of money better than that money in monthly payments.
So, it becomes an interesting discussion (as it did in the comments of Craig’s post). Are income tax refunds good or bad?
My take on income tax refunds
Unfortunately, I agree with Financial Samurai, in that most people may not be disciplined enough to manage the extra money wisely each month. But I also agree with Craig that it’s not a good idea to receive an income tax refund each year.
Personally, I’d like to see people have the extra money each month to make headway in paying down debt, giving more, or building their savings. Not having the money each month for these areas can be costly. Let’s dive a little bit deeper.
1. Income tax refunds are good for emergency situations
If an emergency arises, even a few extra hundred dollars in savings can help (assuming the emergency fund isn’t already fully funded). Maintenance repairs are great examples. The money in savings can help if something needs to be fixed on the car or house and avoid the use of a credit card. While that money may not earn much interest for the given year, it’s too costly for it to not be available until you receive your refund.
2. Income tax refunds are good for giving situations
Assuming you’ve given or tithed based on your gross income, the income tax refund or extra money each month isn’t typically used for this purpose. But it is used if you’re stretching your giving beyond the tithe or giving to Christian ministries. In those cases, the giving will help fund and provide for ministry or church operations each month.
3. Income tax refunds are good for Debt situations
As Craig mentions in his post, not using the extra money for paying off debt can be costly too. The interest can grow on credit cards through out the year. Having the money to pay down this debt each month can help you make faster headway and avoid the additional interest charges.
Personally, I’m in favor of helping people learn to manage money wisely each month through good budgeting and expense management practices. And if there is still a tendency to spend the extra money, automatic withdrawals or bank drafts can be set up across each of the three areas mentioned to avoid the temptation.
What’s your take on income tax refunds; good or bad? But, wait! Before you express your opinion here in the comments, head on over to both Craig’s post and Samurai’s post and let them know your thoughts. Afterwards, leave me a comment here so I’ll know to go see what you wrote. I’m interested to see what you think.