Tax Refunds are STUPID! Don’t Fall Into the Trap


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Stupid Tax Refunds

Tax Refunds

Yeah, that’s right, I said it. Tax refunds are STUPID! It is amazing how many people I talk with that “can’t wait to get my tax check.” Highly educated people that are both friends and family. Why? Why are they so excited? Why are they enamored with the fact that they just gave the Federal Government an interest free loan for the last 12 months? If you get a tax refund (with the exception of EIC, and some special circumstances) STOP! If anyone needs an interest free loan, it’s you!
Figuring out how to maximize your take home pay is not a difficult thing to do. There are just a couple of simple steps to follow:

How to Maximize Your Take Home Pay
  • Identify how much money you got back from the government last year
  • Divide that amount by the number of pay periods that you receive in a year (for example, if you are paid bi-weekly, you would divide by 26)
  • That is the amount that you would have been able to increase your take home pay each pay period last year. What could you have done with that money?
  • Many employers can estimate the effect of withholding changes per pay period for you. Ask your human resources department if you have questions.

In many cases, the people that are getting these massive tax refunds are the same ones that are telling me “I’m gonna use my tax check to finally pay off the Visa.” Can you say double whammy? You mean to tell me that you have let the Federal Government have your money interest free for a year while you paid someone else 20%+ interest (in most cases) to carry a balance on your credit card? Really? How is that a good business decision? Let’s look at the numbers.

Big Tax Refunds vs. Credit Card Balances



Assume you have a $4200 balance on your Visa card and you are only making the minimum payments on it until you get your big tax check next year. Do you realize that, that Visa will balloon to nearly $5000 by the time you are “ready” to pay it off? Let’s also assume that you are like many of the people that I talk to and your tax refund is going to be around $5000. We will use $5,200 to make the math simple. Do you realize that you could have an extra $200 per pay period if you are paid bi-weekly? If you were to apply that amount to the card, in addition to your minimum payment, that your card would be paid off before “tax time?”

Why would you pay the price of interest to not let your money work for you? Not a good idea. Not a good idea at all. Make your money work for you. I hear people all the time say “I will spend it when I get it if I don’t have a tax check.” Yeah, right. Like you are really gonna pay off the Visa with your tax check? Probably not. That’s how the balance got to where it is! We pay everything electronically. When our checks are direct deposited into our accounts, the bills are all paid immediately. As I drink my coffee, on payday, I pay the utilities, etc. I transfer the money that I need to transfer for “future purchases” into a separate account. Then, I go to the bank and withdraw the money that I use for our cash purchases such as groceries, restaurants, gasoline, clothing, etc. By me paying every single bill first, there is never a bill that “doesn’t get paid.” The line “I will spend it on something else” is garbage. What that tells me is that you are weak.

Skip the Tax Refunds

Tax Refunds Pic 2Money is an inanimate object. Why do you let it control you? Why can’t you control it? Probably the most important question is: If the Federal Government can’t even handle it’s own money, why in the world are you letting them have yours? Tax refunds are STUPID. It’s plain and simple. Get smart in 2012. Have your money in your pocket. It’s just that simple.

~David

Comments

  1. This was really a stupid uninformed article. Of COURSE you can get more money thru the year. but isnt it more fun, and easy to have a big chunk coming at one time?

    • Yeah, and for the people carrying debt, let’s go ahead and have fun while they pay 20% interest on their credit card balance instead of paying it off. I am thinking that stupid and uninformed may apply to more than just your perception of the article.

      • Im in the boat of not having any debt(outside of car loans), and with our deductions we normally clear over 14K in our return. We claim 3 and still end up with more back than we pay out. So what is your suggestion? We normally use the refund to fund new toys/gadgets/pay off car loans and such which keeps us out of debt.

        • Adjust your withholding so that you have the benefit of that money all year long. Even if you are only getting a 3% return on your investment, that ends up being $420 in interest or the equivalent of a car payment in most households. Create a separate savings account just for your withholding adjustment. If the difference is $200 per pay period as I used in the example, have $200 electronically deposited from the paycheck into that account. Don’t touch it! If you don’t have debt, let it grow. At tax time, if there are things you want to do with your “refund”, you already have it in your possession plus interest. This also protects you in case you end up owing a little bit. You have done the withholding, however, you are the one that is getting the benefit of the money if you need it instead of it sitting in a government account.

  2. Help! My hr dept acts like I’m trying to commit tax evasion and can go to federal prison when I ask about how to do this.. so my question is this: I am married to a full time student, with no student loans, and we have a child.. what should I be withholding? 2 dependents or 1? We got back (gasp) $8000 last year!

    • What you have “withheld” from your check has nothing to do with your tax liability. You don’t know what you owe until you file your return at the end of the year. The withholding is just a way for you to not “owe” money when your tax bill comes due. You can claim whatever you like.

  3. You forgot to mention that some people get a $5000 tax rebate, but only pay in $3,000 throughout the year. It’s like free money that the rest of us have to pay for. Just another reason that tax refunds are STUPID!

  4. I would have loved to have read it when I was, say 20ish. I’ll never forget being young and stupid, knowing NOTHING about finance charges or percentage rates (I grew up in a debt free home and my parents had no credit or credit cards anywhere, I didn’t latch onto that habit). Our humble home was even “mortgageless”. Imagine getting hitched to a man 9 yrs my senior <<>> OUCH!!! We paid $3120.00 for a w&d valued at 600.00 !!! Hitting my head against the wall when I think of this. (price quotes may vary, I cant remember exact figures)THANK YOU DAVID FOR ALL THE KNOWLEDGE

  5. AMEN AMEN!!!!!! I have always been good and keeping my withholding so that I never get back more then $500. I can have plenty of fun with $500 and fun through out the year. Last year my husband was deployed and we recieved back over $3000. I was shocked! We did also have a baby that year. But when I told my friend about it she said that was a horriable amount and that she always got triple that. My responce was, “Hun we either need to have a talk or you need to sign up for Fincinal Peace University.”

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