Income Tax Refund: Is It Good or Bad?

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.

Income Tax Refund: Good or Bad?
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.

About Jason Price

Jason Price is a family man saved by grace, passionate about faithful financial stewardship (1 Cor 4:2 NIV), soccer and the Pacific sun.

  • http://mymoneyminute.com Jason @ MyMoneyMinute

    I kinda agree with both, and I look forward to posting about it soon as well. Craig’s example of $500 in interest is compelling. What also is compelling is the fear of owing money to the IRS. With varying income and life circumstances, there hasn’t been a “typical” year to base my taxes on. Last year we owed $2,500, this year we get back $350.

    I think it depends on your life stage. If you have the same job, same home, same kids, etc., then it would be easier to nail it down. But if circumstances changed, I’d rather get more money back instead of scrambling to come up with a hefty sum of money.
    .-= Jason @ MyMoneyMinute´s last blog ..Sinners to Saints: What To Learn About Success =-.

    • http://www.onemoneydesign.com Jason Price

      Jason, completely agree it is easier to nail down with stability. I know for our family this has been pretty tough. Moving, kids, etc. It all impacts your income taxes! I definitely think it’s better to get a little bit of refund versus owing the IRS! Yikes.

  • http://www.moneyhelpforchristians.com Craig Ford

    Jason,
    Thanks for joining this conversation. I enjoyed reading your comments and thoughts.

    Man, what is it with FS and I? I think he has disagreed with my last dozen posts. But, alas I like the guy because he always does it in style.

    Here’s my thoughts. I think people are more likely to be responsible with an extra $100 per month than $1,200 at the end of the year. There’s just something about big chucks of money that ‘mysteriously’ appear that make people go bonkers. How many times has someone said, “I’m getting a big refunds so I think I’m going to go out and buy …”
    The truth is if someone can’t save their money either way the only question is blow it all at once or a little every month.

    Oh, and one last point – I almost always disagree with things I write too.

    • http://www.onemoneydesign.com Jason Price

      Craig, thanks for commenting. I think in general people have to be able to manage $1 as well as $1000. That may not be true for the majority of people which is why I’m so dedicated to this work! :)

  • http://www.financialsamurai.com Financial Samurai

    Jason, because you agree with me, I think you are brilliant! :)

    The cookie by the bedside example should be good enough proof why there’s NO WAY in heck someone will be disciplined to save the average $200/month in extra cash flow, and/or use it to pay off expensive debt.

    People are delusional into thinking they can be disciplined every single month.

    However, when that $2,400 hits come year end, you are going to think long and hard about blowing your money on something stupid b/c you’ll realize it took you 12 months to save that nut. I firmly believe most people see their tax refund as an opportunity to pay down a good chunk of debt, or increase their savings.

    Stay on the smart path my man!

    Best,

    Sam
    .-= Financial Samurai´s last blog ..Do “C” Students Deserve “A” Lifestyles? =-.

    • http://www.onemoneydesign.com Jason Price

      Thanks, Samurai. While I do agree that people might be more concious about managing a large amount (refund), I’m still in favor of people learning to manage wisely each month and avoid the large refund. If they can do that, they can have the extra money for all the reasons I mentioned in the article. Thanks for commenting!

  • http://thesixfigurediplomapayoff.com Thomas Hill

    I’m in the boat this year of figuring out what to for my 2011 withholdings. I’d like to break even if I can, not owe or get anything back. Does anyone know of a good calculator online that helps you determine the right withholdings? My typical situation is married filing jointly with two young children.

    I’m not going to lie though, this year we are getting a HUGE return (had a new baby last year), and it is going to be nice to pay a big chunk of debt off in one fell swoop.

    I think now at this stage in my financial journey I would be able to manage the extra income each monthly wisely towards debt. But, I know in past years I wouldn’t have been so wise and the money would have been whittled away.

  • income opp

    i really believe this is a good way to earn money.great idea in today.s economy.