Of course tax time is stressful and confusing. We can list any number of mundane tasks that we’d rather have engaging our free time. I believe that cleaning bathrooms would even contend. However, for a large majority of Americans, completing your tax forms is not all pain for no gain.
According to surveys, 85 percent of Americans expect a refund this year and the average check from Uncle Sam will be just under $3,000. That’s no small chunk of change. Generally, I like to owe a small amount at the end of the year. This year, to my surprise, I failed miserably. I had instead a sizeable refund.
It all begs the question: is it good to have a large tax refund? Honestly, you’ll get different opinions. Here’s why it’s not an easy question to answer.
Why It Is Good
Did you ever wonder what the secret ingredient is for staying out of poverty? Research has an answer, which is growing assets. People who have assets to draw on in times of trouble have the best odds of avoiding poverty. That makes savings a critical element to financial success. The problem is that most Americans aren’t good at saving.
Having a large tax return is a good way to force yourself to save. It all comes out of your paycheck and at the end of the year, you get a nice big refund check to help build your assets.
Also, since interest rates are so low, you don’t really have much to lose in the way of interest. With little to gain in saving, there isn’t much need to fine tune your income tax withholding.
Why It Is Bad
Tax refunds certainly have the potential to work like force savings. The problem is that most people spend their tax refund, they don’t save it. Only 20 percent of tax refunds get used for investing or savings. The rest goes to balancing the monthly budget, vacations, spending sprees and debt reduction.
If a tax return is going to be used for spending, it’s likely to be better received monthly, where it can be directed wisely. It also helps insulate you from unexpected expenses and helps you avoid having to take out credit card debt, bank fees and late payments. If you are going to spend your tax return, you are probably better off bumping up your paycheck and not getting a big windfall that will get frivolously spent.
While it is true that savings accounts earn very little interest, you might be missing unforeseen investment opportunities. Having your money tied up in taxes restricts the use of a large amount of money every year.
Having a big refund is neither good nor bad. It really depends on how you plan on using it and how disciplined you are with your finances.