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Blogging for Change Blogging For Change
by Jesse Campbell on March 25, 2014

The case against receiving a tax refund

The deadline to file your tax return is rapidly approaching. To many Americans, tax return season isn’t just a bit of annual book keeping. It’s akin to a personal holiday. It’s something to look forward to. It’s National I’ve Got Some Money Coming My Way! Day.

That’s because many Americans knowingly overpay on their taxes, and then treat their tax return as an annual bonus, rather than what it really is – your money being returned to you.

A recent poll by the National Foundation for Credit Counseling (NFCC) found that nearly 60% of Americans intentionally overpay on taxes in order to receive a federal income tax refund.

"The findings suggest that receiving an income tax refund has become standard operating procedure for some people," said Gail Cunningham, spokesperson for the NFCC.

You could argue (as many do) that intentionally overpaying on taxes is the only way some people can save money. What many people don’t realize, however, is that if they can manage their monthly expenses successfully while overpaying their taxes, they could just as easily manage those same expenses while paying the proper amount in taxes, and building their savings, all with the added benefit of earning interest on those savings.

Need more reasons why overpaying on your taxes isn’t in your best interest?

  • When you overpay on taxes you are effectively loaning money to the government at a zero percent interest rate. If the money wasn’t automatically deducted from your paycheck and instead a government representative came to your door every two weeks and said, “Hey man, I need to borrow $50. I swear I’ll pay you back in the spring” would you be so excited to cut them a check?
  • If the point is to save money, you can accomplish the same thing (with interest) by having a portion of your paycheck automatically deducted each pay period and dropped into the savings account of your choice.
  • By overpaying on taxes you have less money available week-to-week, which can lead to using (and potentially overusing) credit in order to make ends meet. If you plan to use your tax refund to pay off debt, ask yourself, “Would I even have this debt if I’d had access to all of my money in the first place?”
  • How do you really use your refund? Even if you just use your refund for a once-a-year splurge, you could still achieve that end by cutting back on your taxes and ramping up on your savings. In fact, you’d be able to splurge even harder (if you were so inclined), because you'd have added interest on top of your savings.

"Often the very people who celebrate receiving a refund are those who are most in need of extra money in their pocket each month," said Cunningham. "Living paycheck-to-paycheck, people often fall behind on important priorities such as rent or vehicle payments. With the refund in recent years averaging close to $3,000, an extra $250 every month could mean the difference between eviction and repossession, yet many people remain reluctant to forego their habit of receiving refunds."

You can use the Withholding Calculator at IRS.gov to calculate the proper number of withholding allowances for your situation. After determining the appropriate number of allowances, you should complete a new W-4. Workers are allowed to submit an updated W-4 to their employer at any time during the year.

If after adjusting your withholdings you end up with a higher paycheck, you need to make a plan for how you’re going to use that extra money. You can achieve any goal, you just need to make sure that you’ve got the right goal and the right plan to get you where you want to go.

Posted in:  Taxes, Saving

Comment(s)

Adrienne Waeschle says:
March 28, 2014

Excellent article. It makes sense doesn't it? I have been one of the "60%" all my life, but no more. Having our money in our pockets weekly will be of great benefit to us, and I think it will help make budgeting easier for us and allow us to be more successful in our DMP.



Anonymous says:
March 26, 2014

I usually receive a pretty large refund every year. Much more than I pay. I also receive assistance from the State to help with rent and food. My fear is that if I take the refund throughout the year instead of one lump sum, therefore increasing my monthly paycheck, that this money will be calculated into my monthly income and decrease the amount of assistance I receive. So if I end up with 600 more a month in income that would be amazingly helpful. However, if my rent then increases 180 and my food benefits are taken (another 180) and my daycare assistance is decreased because of this higher income, I am not really any better off.



Earle Hartshorn says:
March 27, 2014

I would LOVE to not overpay my taxes, but every time I have tried that I ended up having to pay out a SUBSTANTIAL amount and ALSO ended up paying penalties. So, I overpay and get back a refund, paying that penalty in lieu of the greater one. The US needs a simplified tax system so that we can properly calculate and pay our taxes. The system is broken, let's fix it!!



Eric Blaise says:
May 21, 2015

You can kind of understand why people overpay on their annual taxes, It beat short changing the collector. I would rather overpay than later find out I did not pay enough, there are consequences that accompany such an error, one of them is tax fraud. Not to mention, as the article stated, it will feel like a huge payday.



richard huerta says:
March 28, 2014

people pay extra because they're afraid to pay a penalty and that can be very costly



Roland says:
March 31, 2014

I wish congress would simplify income taxes so that a mere mortal can effectively plan. I'm getting a refund this year and I'm not happy about it. It's because of the college tuition credit. If not for that, I would have come out nearly even, owing about $500.



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