Smart Reasons to Save, Use and Invest Money

Reasons To Get A Tax Refund

This is yet another year that I’m filing my income tax return…

I know that this year there is a good chance that I’ll have to pay taxes, so the motivation to do my taxes early, no longer exists as was the case just a few years ago.

Most financial advisers will recommend against withholding your income taxes to the extent that you get a tax refund back from the government.   I admit, I agree that from a mathematical perspective, it is smarter to get the money that you earn as fast as possible, and a refund would be the less preferable route.

But from a non-mathematical perspective there are many advantages of letting the government withhold your withholding money, and here are a few of the ones that I have found to be great reasons, and the reason why I let the government hold my income tax refund money for me.

Here are the reasons I preferred getting a tax refund by declaring zero allowances:

  1. Avoiding being hit by a huge tax bill all at once.  Where I was younger there was a time that I didn’t withhold my taxes like I do today.  After a big bump in pay, I suddenly found myself owing the government a lot of taxes with money that I didn’t have.  After that time, I started withholding the maximum amount possible.  Life has been more stress free going this route for my family.
  2. Motivation to file your taxes earlier.  When I would get a tax return, I had a solid reason to file as early as possible to get my money back.  Without such motivation, I’m now in the scenario where I have no motivation to file early, so much like last year, I have no motivation to file early this year…
  3. A easy “stress free” saving program.  Yes, my tax refund has paid for vacations and enables me to deposit that amount into investments.  At a time when most savings accounts only yield .25% (a fourth of 1%), it really doesn’t matter that government could hold you refund for half a year (half a year because your refund amount doesn’t exist at the beginning of the year, and it takes each paycheck to build that refund amount).

The point of this article is that there is more than one way to do things.  I like to take a stress free route with respect to my income tax withholdings, but if you have the discipline with money, the more mathematical approach would be a better route as long as you don’t spend it first.

Hope you did your taxes earlier than I am…

MR

31 Responses to Reasons To Get A Tax Refund

  1. I agree – I had to pay this year and I hated it. I know I probably saved some money, but I would much rather pay too much throughout the year. Ideally, I think it would be great to break even. Maybe one year I can come close…

  2. I have been writing a big check to the IRS in April for years and that’s the way I like it. The only downside is that you might have to pay the underpayment penalty. I haven’t had to yet so I’ll continue as I’ve done.

  3. I don’t mind getting a refund and I don’t think it’s as big of a deal as many of the finance bloggers make it.

    Sure, if you’re getting back $5,000+ then that’s a little absurd, but if you’re only getting back $1-3k then I don’t think its worth all of the fuss we make it.

    I’d MUCH rather go into tax season knowing I’m getting something back instead of worrying that I’m going to owe.

    • I agree, if people are getting over $5,000 back (unless they use the money as a force saving program for a vacation or something similar), then perhaps taking 1 extra allowance might not be a bad idea.

  4. I’ve been self-employed for over 16 years and have gotten used to paying rather than receiving a refund each year. Though I’d love to get a check from Uncle Sam, I’d rather hang onto the cash as opposed to giving the government an interest-free loan.

    • Agreed, to each there own. I’m speaking for the masses though, and since most people don’t have a good grasp of finances (let alone taxes and accounting) I think the path I identified above is a via and workable solution for the majority of us :)

  5. Reason #1 is a biggie. My other half panicked when he realized he had a small refund instead of the big one he was expecting. Can’t imagine what he would’ve done if he had to pay the IRS. I wouldn’t recommend the “break even with the IRS” strategy to anybody that struggles to manage their money.

  6. I’m facing the prospect of a big tax bill this month and it does create a lot of stress, especially when you’re ignored it through the previous year. My problem is that my side income jumps around too much from year to year. So I expect they’ll make me pay quarterly payments this year, but then I’ll probably make a lot less than last year. Hopefully I can convince them to give me an exemption on those payments.

  7. I had to write a check once at tax time and hated it. I swore I would ncpver do it again. I definitely would rather overpay and have a fake windfall than have another lump sum expense to add to the list.

  8. I did my taxes at the beginning of March and I got a refund. I really don’t mind getting a refund, because usually its not enough where it would create a huge difference anyway in regard to interest income.

    • My exact sentiments! Especially in the current market, the interest from the banks is sooo low I just don’t see much advantage to taking on the additional stress…

  9. i usually have mine lined up so that i will get nice refund each year… yes, it is a tax free loan to the government.. but it gives me something to look forward to each year, and often allows for us tackle large projects that we would never be able to afford otherwise.

  10. I don’t like overpaying throughout the year, but I do like refunds. 2 years ago we owed nearly $5k between state and fed, last year we owed around $2k, and this year we are going to receive a refund of nearly $2k. We never know in advance whether we’ll owe or be owed because we have a number of investments that can throw off “income” or “losses” without us seeing or having to pay a dime of cash flow either way, and we don’t find out those numbers until tax season. The last K-1 finally showed up yesterday so everything is finalized now.

    I’d always rather go with the mathematically preferable way (we have no trouble covering tax bills), but like I said it was nice to unexpectedly receive money instead (especially since we thought we were underpaying throughout the year).

    • Wow, sounds very complex. I have one energy company that is a limited partnership, and I hate dealing with it at tax time. It was a bit easier this year, but still took way to long…

  11. I understand where you’re coming from. I’m a believer in limiting financial stress, and in the notion that the mathematically preferred way isn’t necessarily the best way for everyone.

    • It’s funny… I understand the financial advantages, but I prefer the less stressful route.

      Now if the interest rates at the banks were much, much higher… well, the story might be a different one :)

  12. Stress free is always a good way to go. Though I haven’t gotten a refund in years. At this point I’d rather not. Plus I’d never have to worry about being dependent on a refund every April either.

  13. In this no interest rate environment, it makes more sense to hold a little extra back each week and get a big chunk when you file your taxes. It creates an automatic savings account for you.

  14. I like getting a refund – although my refund was bigger than I expected this year so I changed my allowances. I still hope to get a refund next year though, I think it helps me save towards some bigger goals. Yes, I understand it’s an interest free loan to the government, but the money I would have made each month by saving it myself would probably be offset with the additional money I would spend. Just being realistic…

  15. I remember when I was younger people would always say claim a high number most of the year to get more money now, then switch it back to a low number later on in the year.

    I actually never did that. I remained pretty constant with claiming 1 just about for as long as ive been working