FiveThirtyEight:
Americans hate filing tax returns, but they love getting refunds. More than three in four taxpayers get refunds, and the average amount they get back is close to $3,000, according to IRS data. That means that for many Americans, their annual refund is the biggest single check they’ll get all year.
But if you’re among the millions expecting a payout from the IRS this spring, make no mistake: That money was yours all along. Getting a refund means you paid too much in taxes last year and the government is paying that money back — without interest.
I’m no tax expert but I’ve always told people they should work their taxes so they get the smallest refund possible. Otherwise, you’re just giving the government an interest free loan of your money.
Pretty much.
I never thought this was a big deal because interest these days is crap, so I liked the psychology of getting a nice big check that I put right into savings so that I didn’t spend it. However, when I read this article in my news feeds I was like “holy crap I should be putting this money into my 401k right away… duh!”
Ha ha ha ha!!! Tax refund? Good one!
Oh no, what will I do without that 0.5% in interest that I would have gotten instead?
“Interest” is variable. What does your credit card company charge you for only making a minimum payment? How are your friend’s student loans looking these days? Do your parents actually own their house yet?
A big tax refund is a bunch of cash that could have been earning months of real dividends from a decent no-load mutual fund, but instead was tied up by an employer’s sloppy math.
Please see my comment above.
If me giving the government an ‘interest free loan’ helps them not have to borrow from other countries (with interest) then I don’t really have a problem with it.
It’s a government of the people, by the people, for the people. That means the people have to pay for it.
I’ve can’t remember the last time I ever heard the words ‘Refund’ from my accountant. #smallbusiness #goodtimes
At my job, we choose the withholding. I don’t know if that’s just here, or if it’s how it works everywhere, but it’s a good chance it’s your sloppy math, not your employers. 🙂
Also, dividends? LOL. How much of a refund are you getting? 100k? For most people the money that would be generated is negligible. Probably closer to $20 than $100.
In the pay check, most people would not save it, and earn from it. It would get lost in their day to day spending. Personally, I like getting a nice refund. Easier than saving up for something like an Apple Watch. 🙂
It’s a convenient semi-forced savings program, which is useful for many people; “money you can’t fritter away” has value in many cases, outweighing “not getting interest on that money”.
(Interest free loan vs. peace of mind of knowing you’re not going to owe taxes come April, also.)
Not when it’s a tax credit for home mortgage interest and property taxes. I had to pay them, and now I’m getting some of that back. I’ll be selling my house this year probably, and when I do, I no longer get that tax credit. So I can’t modify my withholding, to reflect what I’ll get next year, because after that, they’ll be withholding too little and I’ll end up having a big tax bill at the end. And they certainly don’t make it easy to figure out how to manage that so that I’m close to zero dollars.
My fiancée had a $4,300 tax bill this year, because her son no longer lives with her, she doesn’t have his college tuition to write off, and some tax laws have changed regarding rental properties. More to it than that, but from year-to-year, you never really know what your liability is going to be, so make sure you don’t make choices that might come back to bite you because you didn’t anticipate some change in how you’re going to be taxed.
LOL You’re welcome. 🙂
As the article says, “the average amount they get back is close to $3,000.” As Moe points out, put that in a “decent no-load mutual fund” and you’d actually make money from it.
You can’t compare mutual fund returns to interest returns due to risk. That’s why the core interest rate used in any IRR calculation is the risk free rate (which is basically zero). Since a tax refund is risk free savings, the proper comparison to similarly risk free vehicles, like a savings account.
Apparently, I do give them extra money. That’s why they give me a refund.
As the resident contrarian, I’ll posit that over-withholding from their paychecks is the closest thing to a savings account most people have. Granted it’s at 0% APR, but what are most bank passbook accounts doing right now? Plus, the US Treasury is more than FDIC-insured (it insures the FDIC). Also, the spending driven by a lot of, let’s just be honest, less than fiscally savvy people who suddenly get an infusion of cash late every winter does a lot to help in the post-Holiday quarter that’s always a little anemic anyway. Finally, no matter what the libtards say everyone stands to gain from government spending in some way, so all those interest-free loans to the Treasury means that fewer bonds need to be auctioned (although rates on those right now are approaching negative numbers). This is also improves the government bond market since the US Government isn’t competing, for as much money, with other governments. On a macro economic level, I’d bet that it’s a net positive, but I wouldn’t want to do the math!
Oh, self-employment tax. How I love you.
Spot on. Best comment here and the most realistic. What’s wrong with the current tax system is it’s difficult to determine just how much tax to have taken out. One or two dependents? Three? It’s not granular enough, not to mention it’s all not transparent enough. And that’s just scratching the surface.
Not much though. In savings you’d make a buck. In index funds you’d maybe make about $235 according to the article. And that takes on risk. You could also lose money.
To me it’s a smart way for people to save money because most don’t have the discipline to squirrel away tiny amounts 26 times a year and it’s likely not worth the extra effort to maybe make a couple hundred bucks (and maybe lose the same) vs. the guaranteed no-interest rebate.
I know for me, personally, when I get a refund check it goes right into various savings as a windfall. If I got a few bucks every couple weeks I likely wouldn’t be disciplined enough to save or invest it and get the same return.
It’s only smart by comparison with a baseline of neglect. And even if you assume it’s okay that people haven’t been raised to know how to save money without having it done for them, this isn’t much of a savings plan.
It’s smart considering the risk, both the risk of the investment and the risk of simply not squirreling away the money in small increments. If you avoid the risk of investing then you make a buck. Definitely not worth the effort.
The real problem is that you could have been earning compound interest on the money by investing it in the market yourself.