Many finance gurus decry tax refunds as interest-free loans to the federal government.
Why let the government use your money for free when you could perfect your withholding and get more of your hard-earned cash each paycheck?
Though the logic is solid, it doesn’t acknowledge the many advantages of getting a tax refund.
Reasons To Celebrate a Tax Refund
Do financial wizards make you feel bad about celebrating your tax refund? Stop letting them.
Here’s why tax refunds work.
1. It’s a Hefty Lump Sum
Many people celebrate tax refunds because they are large sums of money. Those with substantial deductions could see refunds in the thousands of dollars.
There’s an underrated bliss to getting a massive deposit in your bank account outside your regular paycheck. It feels good.
Logic may say it’s wrong, but logic never accounts for psychology. It may be more practical to perfect your withholdings, but getting a massive return helps you feel good, and sometimes, that’s more important.
2. It’s Easier to Budget
Getting a large sum feels great, but it also makes budgeting for savings and big purchases easier, especially for those lacking financial literacy.
For example, a $2000 tax refund spread out over 26 paychecks would amount to $76 per paycheck, which isn’t that much. Although financially savvy people who scrutinize each penny could easily put the $76 toward their financial goals, a large segment of the population would spend it. It would go to coffee drinks, takeout, random snacks, or other small purchases.
Many people, myself included, wouldn’t think to save it for a new wardrobe, that online class they wanted to take, or other larger ticket items.
A considerable sum like $2000 is easier to think of as bonus money for big-ticket purchases rather than pocket money for random purchases.
3. Quickly Achieve Goals
Budgeting with a massive lump sum also allows you to have quick wins.
Putting $1000 of a $2000 payout into a vacation feels easier than meticulously budgeting $43 per paycheck. The result is the same, so those who struggle to budget may benefit from the quick win.
It’s crucial to allow yourself psychological wins sometimes. Everything doesn’t always have to follow logic. We must do what’s best for our overall financial well-being, even if it’s unconventional or illogical.
4. Refund vs. Owing
Would you rather get a refund or owe money?
The US tax system is complicated at best. It’s littered with confusing rules, credits, deductions, and loopholes. If you miscalculate your withholding, you may owe money to the federal government at the end of the year rather than getting a refund.
The same people who can’t budget that extra $76 per paycheck would also struggle if they were hit with a surprise tax bill.
It’s far better to get a refund than to risk owing money, especially if you can’t afford the bill.
5. No Desire for Complex Math
Math lovers may relish the opportunity to perfect their withholding to the dollar. Most people have neither the capacity nor the desire to deep dive into the math and perform the necessary calculations to determine precisely how much they should give Uncle Sam each pay period.
6. Or the Research
The math is only half the battle. To correctly calculate your withholdings, you’d have to understand the ins and outs of the complicated tax code and correctly predict your earnings all year.
Determining how much you make (and thus how much you owe) is far more complicated than your salary. You must include expected interest earned, dividend payments, and side hustle income while considering deductions.
Ensuring you pay enough year-round for a substantial tax refund can relieve the anxiety of figuring all this out yourself – and worrying about making a costly mistake.
Getting a Tax Refund Isn’t Bad
Don’t let personal finance influencers convince you that receiving a tax refund is wrong. If you enjoy it and it makes sense for your lifestyle and budget, keep doing it.
There’s nothing wrong with getting a tax refund. You must do what’s right for yourself, disregarding what the gurus tell you to do.