Pros and Cons Of Getting a Tax Refund

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taxttimeAh, tax time. That special time of year when calculators are out, shoeboxes full of receipts are being sorted, and we’re all wracking our brains to try to come up with just one more deduction. And for many of us law-abiding citizens, once the stress of filing our taxes has abated, we’re rewarded for our efforts with nice, fat tax refund a few weeks later.

I love getting a tax refund, and I know I’m not alone – in 2011, the average tax refund was just a little over $2,900. That’s a really nice chunk of change to have turn up in your checking account around Easter, and it would seem difficult to find a down-side to that kind of windfall. But as with nearly all personal finance topics, the subject of the tax refund is fraught with controversy.

Most financial professionals advise against getting a big tax refund because if you allow the government dip its fingers into your paycheck – at least, more so than they’re entitled to – you’re giving it the privilege of a one year, interest-free loan. Let’s say that you got the average tax refund in 2011, $2900. Uncle Sam got to do as he pleased with that money for a whole year, only to pay you back in April without interest.

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On the other hand, if you had held on to that $2,900 and invested it in the stock market on January 1, 2012, you would be sitting on $3,248 right now, thanks to a healthy 12% stock market return in 2012. Whoa! Suddenly that $2900 tax refund is looking like a bad deal.

Still, I think it’s hard to categorically say that getting a tax refund is 100% wrong, 100% of the time. Because let’s be honest – if I held on to that $2900, would I really have invested it? Remember, that’s $2900 spread throughout the year, not one lump sum. Psychologically, it’s much easier to fritter away small amounts than large, and that’s probably what I would have done with the extra $111.50 per paycheck. But that $2900, all at once, in April? That’s real money, and would go straight into savings.

So, as I see it, these are the pros to getting a tax refund:

  • A big chunk of money coming my way all at once; this is much more likely to get saved than spent
  • Reduced stress about being disciplined with my income every month – getting a refund with that money means that I only have to have the willpower to save one time
  • A nice, mid-April mood boost

And these are the cons:

  • The government gets an interest-free loan, courtesy of my paychecks
  • Less ability grow wealth, due to smaller paychecks from tax overpayment

It looks like there are more pros than cons to getting a tax refund, even though I did fudge the last one a little bit. Truly, though, as with so many other personal financial decisions, you have to do what’s best for you, based on your own knowledge of yourself and your personal spending and saving habits.

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But I know I’m not adjusting my W-4 anytime soon!