How to Save Money » Taxes

Why i’m okay with most people getting a tax refund

It’s that time of year again. No, I’m not talking about spring, even though it’s just around the corner. And I’m not talking about the beginning of the baseball season either, even though I am unreasonably excited about that. Instead, I’m talking about tax season.

I haven’t completed my return yet, but I have started on it. This is significant, considering I usually don’t bother starting on it until about April 15th. In fact, I’m probably about halfway done. I should probably buckle down and finish up the rest, but I’m not entirely motivated by the activity. Partially it’s because it’s not a very pleasant thing to do, and partially because I know that I’m going to owe the government money this year.

If you’re due to be getting a tax refund, I can see why you’d be a little more excited about doing your taxes. That’s your money, just sitting there, waiting for you to claim it. You can use it for all sorts of stuff, some things would be smart, others would be foolish. Still, letting the government just keep it would be the most foolish of all.

This begs the question: should you even be getting a tax refund at all?

Negatives about getting a tax refund

If you put yourself in a position where you’re expecting a significant tax refund, you’re essentially giving the government an interest-free loan. An example, if you’re looking at a $2600 tax refund, you just gave the government $50 more per week than you had to. Why should the government use that money, when you could have used it to put yourself in a better financial position?

Most employers automatically take off a little bit extra on your withholding tax, since they don’t want to hear you complain they didn’t take off enough. With just a little work, you can get HR to take off a little less, at least bridging the gap between your refund and owing to the government nothing. It’s actually pretty easy to do, assuming your HR person has greater brainpower than a peach. Most tax returns are simple enough.

We can take this a step further if you’re sitting on credit card debt. That $50 per week could be used to pay down that debt, getting you a guaranteed 18% return. By letting the government use that money for a whole year, you’re missing out on a few bucks.

However, saying all this, I think most people should be getting a tax refund.

Positives about a tax refund

Most people aren’t very smart with their money. They waste it on booze, lottery tickets, and all sorts of other stuff. They also occasionally use it to buy stuff they need too.
If most of the population had an extra $50 a week, they would let it slip through their fingers. They wouldn’t save it, or even use it on their needs. They would simply spend it foolishly.

All that $50 would be is an increase in disposable income. After all, somebody is still going to be able to provide for all their needs without it. Most people just view disposable income as more money they can spend. Sure, you and I look at it and see additional money we can save, but does the rest of the world? They’d find a way to spend it.

When somebody gets a large lump sum, like a tax refund, it causes them to pause for a moment and consider what they’re going to do with it. If someone gets their $50 per week in a lump sum, that $2600 all at once is going to feel like a lot of money.

Sure, they still might blow it on something. They might put it into savings with good intentions, and then to find out a couple of months later that it’s all gone. Or someone might use it to buy a rockin’ home theater system or hockey season tickets. The point is, if they waste away their lump sum or if they waste their extra cash every week, aren’t they in the same boat?

Hopefully, if somebody handed you a cheque for a large amount of cash, you’d do something smart with it. I have no scientific evidence to back this up, but I know I’d be more inclined to pay down debt with a lump sum than I would be if I got a little extra every week.

However, if you’re one of those people who has no debt and has their financial house in order, then by all means. Get rid of that tax refund. You’ve earned the right to your money.

Comments

  1. Ramona

    Tax deductions aren’t discretionary, they’re a mathematical calculation determined by the TD1 form. Assuming the employee filled this in correctly, tax deducted should be extremely close to tax owed.

    Tax refunds result from something changing in a taxpayers situation – RRSP contribution, new tax credit, incorrect TD1, etc.

    You can check the deductions yourself. Google TD1 forms, complete, find appropriate level. Then google payroll tax calculations, put in salary, exemption code, and calculate. Voila! You have just become a payroll expert. It’s not magic, just simple math.

  2. passiveincome

    I would rather need to pay tax than to have tax refund. I prefer the government give me a free loan than I give them a free loan.

  3. ChristianPF

    I like to owe the government a little bit (just a little bit) of money when tax time rolls around. Not more than I legally should, but enough to where I didn’t hand out an interest free loan.

    This scares some people. Understandably so. If you’re fearful of owning the government too much come tax time, I’d recommend having a financial planner or tax consultant look at your estimated tax liability.

    Truth rang loud and clear from every paragraph of this article. Thank you so much!

  4. mycanuckbuck

    I gotta admit – I usually end up with a tax refund. But I like getting one. I think I just like making sure I’m covered. I don’t have any high interest debt the money could be going towards instead, and I’m usually pretty responsible with the money I get back. One year my husband got 8 bucks – he said he was going to spend it all at Burger King! 🙂

  5. Ian

    I wish I could get hockey season tickets for $2600.

  6. Kat

    I have adjusted my TD1 to reflect my disability tax credit and my tuition (mandatory courses that I must take to maintain my professional designation). However, I do have a lot of medical expenses during the year and end up with quite a significant refund as a result. However, I cannot adjust it on my TD1 and the government refuses to accept my request for reduction in taxes withheld. What can I do? So, I’ll take the nice refund and put it towards my “medical” fund to help cover the costs for my disability. At least I’m putting it to good use. Personally, I wouldn’t mind having a small refund rather than owing money. Most people seem to have had major expenses and a big tax bill on top of it. Talk about bad timing!

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