Saturday, March 5, 2011

Tax Refunds Are For Suckers

According to CNNMoney, the average tax refund for those who have filed so far this year is $3,129.  They point out that the average drops as it gets closer to April 15th because those with big refunds coming often file early.  However, they say that the average tax refund for 2010 was around $3,000, so it probably isn't going to drop by that much.

I've always been of the opinion that tax refunds are for suckers.  If you receive a tax refund, that means that you have paid the Government too much in taxes through your paychecks during 2010, so the Government gives you that money back.  Here's the rub:  the Government doesn't give you any interest on this money that you overpaid to them.  They've gotten a chance to hold onto that money in their coffers for up to 16 months, and yet you don't get any interest on this money.  (As an aside, if you pay your taxes late, the Government charges you interest:  the federal short term interest rate plus 3%).  You are giving the Government what is essentially a zero interest rate loan.  That makes no sense to me.

On the flip side, if you owe money on your taxes, you are getting a zero interest rate loan from the Government.  Of course, if you owe too much money at the end of the year, you will be hit by an underpayment penalty, so you don't want to underpay by too much.  As always consult with a professional accountant to figure out where you stand with your own specific situation, as I am neither professional nor an accountant.  That being said, my own personal strategy is to try to owe some amount to the Government every year.  I have less withheld from my paycheck and more to put into the bank.

Of course, you have to make sure that you can write that check to the Government come April 15th.  If you take the extra money you receive in your paycheck and blow it on beer, then maybe you are better off with that refund.  You are still a sucker though...

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