I hate tax refunds. Some people think, “I can’t wait for my tax refund so I can do X.” If you really don’t want to wait for your tax refund, take steps so you don’t get one.
See, a tax refund is just that, a refund. It’s not a bonus, new money, or an extra paycheck. An income tax refund is money you could have had earlier in the year, that you overpaid to the government, which is now being returned to you, without any interest.
The United States Tax System
First, a bit of a background on the tax system in the United States.
HowIGrowMyWealth.com has a global audience. I focus on the US with respect to taxes because I am subject to income taxes in the United States and have no experience with taxes outside the US.
While I’m not tax attorney, accountant, CPA or guru, I have been in charge of my own income tax returns since college and I have over 10 years experience doing my own taxes.
There are a myriad of tax situations. I’m just writing about my own experience through 2016 as a W2 income earner.
Income taxes in the United States are imposed at various levels. There are Federal Taxes, State Income Taxes (in most states but not all), and in some cases income taxes on an even more local level.
The US has a pay-as-you-go tax system. That means one is taxed throughout the year at a rate that assumes you’ll make the same amount each pay period.
So if one were to make $4,000 in January, the United States Internal Revenue Service (IRS) assumes you’ll make $48,000 ($4,000 x 12) and taxes will be withheld by one’s employer from each paycheck as if you were going to make $48,000.
But the US tax code is hopelessly complex (you can ask 3 different accountants a tax question and get three different answers all of which could be correct) and tax withholding doesn’t take into account changes in income, deductions, credits, allowances, or capital gains/losses.
As a result one could end up owing more or less in tax at the end of the year, once the myriad of factors that factor into an income tax return are known.
Why I Hate Tax Refunds
Imagine you go to a store and buy a shirt and you pay $100 for it. But the shirt really only cost $50. An honest storekeeper would give you $50 change at the point of sale.
But this store owner holds onto your $100 for over a year and then finally tells you that you overpaid and gives you $50 back.
If you didn’t realize you overpaid you might be glad, “Hey, I’ve got an extra fifty smackers!” But what if you needed that $50 a year ago to pay rent, or buy food, or to buy a pair of pants to go with your shirt, or better yet, save that money and earn interest on it. You’ve lost out on all kinds of opportunities for those funds.
Try to Be Rational
Now I get it, just like if you were to find a $20 bill in your couch that you thought you had lost, there is a certain emotional thrill of getting money back.
I also get that as humans, myself included, we’re very emotional creatures.
Sure, humans have the capacity for reason, but unfortunately and all to often emotion rules the day.
I quote my favorite playwright, Oscar Wilde:
Lord Caversham: No woman, plain or pretty, has any common sense at all, sir. Common sense is the privilege of our sex.
Lord Goring: Quite so. And we men are so self-sacrificing that we never use it, do we, father?
- An Ideal Husband, Oscar Wilde
In the witty quote above, I think Oscar Wilde is basically saying that too few of us (men and women) use common sense or reason as often as would be ideal.
Rationally it doesn’t make sense to get a tax refund. A tax refund is money that has been overpaid that is being returned much later with no interest.
I strive to be a rational person. Not in the sense of being a robot, but rather having rational thoughts in the driver seat and emotions serving more of a supporting role, rather than using reason to justify my emotions.
It’s much more reasonable to avoid a tax return and be happy that one has the money throughout the year, rather than get the money in April.
My next article will provide ways in which I’ve avoided getting a tax refund in the past, so that I had more money throughout the year and I didn’t give the government an interest free loan.