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Why Getting a Tax Refund is Bad

April 27, 2017

 

Getting a big tax refund is a magical feeling. It's like finding the last Golden Ticket and winning entry into Willy Wonka's candy forest. Just imagine the level of *chocolate* wastedness you're going to achieve!

 

But there's a catch. Remember the creepy Oompa Loompa songs? And Gene Wilder's psychotic prose? Just like flowers made of frosting, getting a tax refund is better in fantasy than reality. If you’re getting a big tax return it's likely you're doing something wrong.

 

Why are you ruining this for me Sarah?

 

Most of us don't realize that when we get a tax refund we're not winning some kind of prize, we're just being reimbursed with our own money.

 

Tax refunds come to us because over the course of the year, too much tax money was withheld from each of our paychecks. In other words we were overpaying the government and now we're getting our hard-earned wages back. We basically gave Uncle Sam an interest free loan. Which, by the way, is something he would not do for us.

 

And Why is this bad?

 

Over the last few years Americans have received an average of about $2,800/yr in returns. If you're paid bi-weekly that means Big Brother overcharged you by an average of $108 every two weeks. Think about what that money could have been doing instead. It could have been invested in the stock market, adding to your retirement savings, helping you pay down debt, earning a little interest in the bank, and so on and so forth. Instead it was slowly losing it's value.

 

Not sure what I mean by that last part? Here's some good info on how money loses it's value over time. Also consider this- in 1971 Charlie was able to buy a Wonka Bar for 10 cents. In 2017 that same bar costs $3.00. So today with his 10 cents Charlie can only afford to lick the bar of  chocolate.

 

Wonka, this has gone far enough!   -Mr.Salt

 

How Do I Get Off Of This Scary Boat Ride?

 

If you’re consistently receiving a large refund (I roughly define this as $2k or more, not including tax credits) you'll want to contact your employer about updating your W4. Adding one or more exemptions to your W4 form will decrease your withholdings and therefore your refund. You can use this IRS tool to help you determine which changes to make. 

 

Pro tip: Remember that making this change means each of your paychecks will be a little bigger. Instead of blowing that money, do yourself a solid and direct it to your savings via automatic deposit (you'll make Grandpa Brady proud) or increase your retirement contribution. 

 

"Remember what happened to the man who adjusted his W4 withholdings Charlie."

 

What if I prefer to get the refund?

 

I've heard this argument many a time. Some people love getting (and spending) the lump sum and are afraid that making changes would mean owing money. Is that person you? Keep in mind that it's okay to owe a little. Even if the money you'll owe has just been going into your savings account and earning you a bit of interest you're in a better position. BUT if you truly, honestly, don’t trust yourself not to blow through the extra cash, go ahead and let Uncle Sam hold onto it. And contact me so we can work on some developing some better budgeting techniques.

 

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