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Why You Should Never Take a Tax Refund

If you anticipate getting a tax refund, you probably think you’ve made out pretty well. But the truth is, tax refunds almost always represent a loss for the recipient. If you’d figured your withholdings correctly, so that you break even on your taxes or owe a little at the time of filing, you’d actually have come out ahead. Here’s how it works.

Your tax refund is not a payment from the government. It’s a repayment. The government took money of yours it wasn’t entitled to and used it for a year or so. Now, if you wanted to use borrowed money, you would have to pay interest on it. But that’s not the case with the government. So, the amount of money you’re getting back doesn’t actually reflect what it was worth to the government. That’s your first loss.

Secondly, there’s what you could have done with that money if it had been included in your paycheck each month. Let’s assume you got a $3,200 refund, which was roughly average for 2014. Broken down over 12 months, that would have been an additional $267 per month. If you’re carrying $5,000 or more of credit card debt, imagine how helpful that cash would have been. How much extra interest did you pay because you didn’t have access to the $267? In one year, depending on your card’s interest rate, you could have lost hundreds and hundreds of dollars.

Thirdly, there’s a psychological game people sometimes play when they’re expecting a big refund. They get a little loose in their spending because they’re anticipating a windfall. Sometimes, they spend their refund twice over before they even get it. Having that money in your paycheck each month could help you be more disciplined about your monthly spending.

Finally, if you’re truly deep in debt, you might take out a tax refund anticipation loan. Of course, that means you’ll lose a large chunk of your expected refund to get the cash in your hands early. But, if that’s the situation you find yourself in, it’s time to call DebtStoppers. Our bankruptcy lawyers can advise you about your best options for discharging or repaying your debt. Call us today at 800-440-7235 or contact us online to schedule a free consultation.      

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