Why Your Tax Refund Isn’t Exactly Great News

Many of us hope for a tax refund each spring, and about 96 million Americans get one. Whether you’re feeling hopeful or already know it’s coming, a tax refund probably feels like great news. Unfortunately, that’s not entirely true. A tax refund can actually be a sign that you didn’t quite plan appropriately during the previous year.

On average, taxpayers who receive a refund reap about $2,725. That sounds great… So why is a tax refund “bad news”?

First of all, a refund means you overpaid by that same amount during the previous year. So, using the above example, the average taxpayer might have given Uncle Sam an interest-free loan in the amount of $2,725! Now imagine how much interest that money could have earned, had you stashed it in a savings account or retirement account instead.

Second, a refund simply represents the fact that many of us aren’t paying attention to our tax status or planning our finances with an eye to the future.

And third, if you’re like many “lucky” taxpayers you will spend that refund check on a new 3D TV, phone upgrade, boat, or something else. Everyone deserves a splurge now and then, of course, but is it worth missing an opportunity to better prepare for the future?

The truth is, a tax refund feels like a windfall, so you’re more likely to spend it. But if you budget that same money throughout the year, you are more likely to utilize it more practically.

If you’re due a refund this year, consider earmarking that money to pay down credit card debt or stash it in a retirement account. And if you regularly receive tax refunds, it might be time to visit your human resources office. You can request to have a bit less taxes taken from your paychecks, and bump up your retirement savings rate at the same time.

Remember: contributions to a qualified retirement account can lower your tax liability, too. Call us for more information and we can help you decide how to better structure your paychecks in the future.