Is Getting a Tax Refund a Good Thing?

Source: DealsPlus

It’s getting to be that dreaded time of year again – tax season.

You may consider them to be a necessary evil, but once you’ve knocked those taxes out, you can start anticipating the one silver lining of the whole process, your tax refund!

For many people, a tax refund is one of the highlights to their financial year. It’s like an additional work bonus to be used towards a vacation, a shopping spree, or numerous other sources of pleasure.

But have you ever considered WHY you’re getting a tax refund, and whether or not it actually is a good thing? I know, you’re probably thinking “how could a free refund be a bad thing?!”

Let’s break down the pros and cons to getting a sizable tax refund:

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Benefits to Receiving a Tax Return

• You get a big lump sum of money all at once, and don’t have to pay anything out of pocket when filing your taxes.
• It acts as a way of forcing you to save money throughout the year, since extra money is being taken out of your paycheck and you’re not able to spend it.
• By not owing money, you’re avoiding the risk of not having enough cash on hand to cover your IRS bill.
• It may mean your taxes will be less involved to e-file.
• Psychologically, it feels a lot better to receive money back, rather than having to pay more.

Drawbacks of Receiving a Tax Return

• You’re basically loaning the government your money throughout the year for free, without gaining any interest on it.
• Your paychecks are smaller than they could be by adjusting your withholding amount.
• It keeps you from using the money for other purposes throughout the year, such as saving for retirement, paying off debts, or building an emergency fund.
• You might still end up spending it all, and it might even be more likely if you think of it as “extra money.”

The Verdict

It all comes down to whether you’re a financially responsible person. Do you tend to stick to a budget, track your expenses, save money, and pay off debt? Or do you struggle to make ends meet and live paycheck to paycheck, spending any extra money you get? The answer to that question should ultimately help you decide whether getting a tax refund is a good thing for you.

If you tend to be better at saving money on your own, it’s better to get more money throughout the year instead of a tax refund. However, if saving money is difficult for you, a tax refund could be a great way to force you to spend less. Most people who aren’t good at managing their money won’t have the cash on hand come tax time, and that can be a dangerous scenario. If you do receive a tax refund, we’d encourage you to use that money to accomplish a specific goal, rather than simply increasing your spending.

Final Thoughts

Take some time and evaluate which of these circumstances you prefer. Then, assess whether you should adjust your withholding on your W-4 form, to have more or less taxes taken out of your paycheck. Overall, there isn’t REALLY a right or wrong answer, but it’s important to know what choice you’re making and why you’re making it. By taking some time and learning some more about the process, you become empowered to make the decision that’s best for your financial situation.

See the original post featured on DealsPlus: Is Getting a Tax Refund a Good Thing?

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