Tax Refunds Cost You Money!

Are you expecting a nice fat tax refund this year?

Well, congratulations! You lost money!

Don’t fret too much though, because you’re in good company. Every year, nearly 80% of U.S. taxpayers receive a refund.

You might ask, “How could I possibly lose money by receiving a check?”

Well……

Inflation

It turns out that there are a few different ways you lost money. There’s good ol’ inflation for starters.

As you’ll remember from economics, inflation just measures the increase in prices and/or the decrease in the value of money. So, because of inflation, a dollar you have at the beginning of the year will be worth less than a dollar at the end of the year.

So….let’s say you do receive that hefty refund this year. All that means is that you gave a hefty amount to Uncle Sam and when he gave it back it was less valuable. Ay caramba!

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Interest

Besides the problem of your money losing value due to inflation. There’s also the problem of you not being compensated for renting your money to the government.

What do I mean?

Think about this, if you rent a spare room to someone, you’ll collect money from them right? Of course! Because the money is compensation for you being temporarily deprived of the use of your spare room.

If you rent your car, you’ll also be paid compensation or being temporarily deprived of the use of your car.

By the same token, if you rent (or loan) someone your money, they’ll pay you interest as compensation for depriving you temporarily of the use of your own money. That’s why we pay interest. Seems fair.

But wait! When you loan your money to the government in the form of overpaid taxes, they don’t pay you any compensation. You don’t receive squat for being deprived of the use of your money for the year.

That raises the question. Why would you loan it to them?

Well, you really shouldn’t…

You could buy a certificate of deposit or some treasury bills and at least earn a little something…

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Debt

Finally, let’s say that you’re in debt like 80% of Americans 

(By the way, isn’t it interesting that 80% of U.S. taxpayers receive a refund and 80% of Americans are in debt? I wonder if there’s any correlation…)

So, debt. The big bad D. Many of us talk about using our refund to pay down our debt. (I don’t know how many of us follow through with that, but at least we talk about it!)

But let’s suppose you do use your refund to pay off some debt. Good job. But…if you had not given that extra money to Uncle Sam during the year you could have used it to pay down your debt as well, only sooner.

And of course, paying your debt down sooner will save you an untold amount of interest charges.

So basically if you pay extra to the government you’re losing money all around.

You lose because after inflation an extra dollar paid in taxes is less valuable than a dollar refunded.

You lose because you’re not receiving interest payments for letting the government use your money during the year.

You lose because you’re not paying off your debts sooner and are being charged interest by others.

On The Other Hand…

If you receive a refund, you’ve actually lost money. But, nobody wants to find that they owe the government money after doing their taxes. (Just the thought of it sends chills down my spine…)

And of course, if you don’t pay the government what’s due, they make no bones about collecting interest (and penalties) from you.

Because of all that, the best result when filing your taxes is actually a big fat zero.

You don’t want a refund and you don’t want to owe.

But this is easier said than done. Tax laws change, tax rates change, deductions change, and your situation changes. You may be having the correct amount withheld from your check during the year, but if you get married, have a kid, have medical bills or any number of other things, it can change your deductions and exemptions.

Basically, it’s not always possible to get a tax return of $0 without a functioning crystal ball.

This is why it’s important to have a tax guy or gal.

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Seven Suggestions For Spending Your Refund

I started this post talking about the benefits of not receiving a tax refund, but if you’re like 80% of U.S. taxpayers out there you will receive a refund this year.

The question still remains…what exactly are you going to do with your refund? Whatever you do make sure it’s a decision you make and that you give a purpose to your money.

All too often we have money sitting in our account and it just evaporates without us knowing exactly what happened to it.

Below I’d like to give seven suggestions on how you can use your refund this year.

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Build An Emergency Fund

It’s extremely stressful living paycheck to paycheck, but 80% (there’s that number again!!!) of Americans do it.

One way to get out of that cycle is to take your tax refund and save it. With that money in the bank, you’ll find yourself less stress and sleeping easier. (Another way to break that cycle is to take our free 5-day e-course).

Invest

Investing your refund is a wonderful idea if you already have your emergency fund built. While you lost out on the opportunity to collect interest once, you don’t have to lose out again!

Increase Your Skills

I’m a firm believer in building my skills and increasing my value. Investing the refund in yourself is another wonderful option.

It’s like the story of the goose who laid the golden eggs as told by Earl Nightingale. Most of us choose to invest in the golden eggs (car, house, etc.) rather than in the goose who lays the golden eggs (ourselves).

You can change that and start investing in yourself today.

By the way, I would highly recommend you check out Nightingale’s book, The Strangest Secret.

It’s phenomenal. At the time I’m writing this there’s an audio recording of it available on YouTube if you’d care to listen.

Donate

Giving to charity is not only a great option for changing the lives of others, but it’s beneficial to ourselves as well. Maybe you’re receiving a refund but you don’t really need it for anything. It’s just an unexpected windfall.

If that’s the case then great! You’re really on top of your finances, but there are a lot of other people out there who could use a little support. Consider donating to charity.

Buy Something You Need

We all have needs. Maybe you urgently need to replace your tires. Or maybe a refrigerator. Whatever it is, for many of us this refund is a godsend.

Buy Something You Want

Let’s be honest, many of us have secret plans for our refunds. Maybe you want a weekend getaway or a new big-screen TV. If you have your heart set on something that you really want then perhaps you should go ahead and get it. This is a golden opportunity, after all, to get something good for yourself without it actually affecting your normal financial situation.

But consider this, the things we buy don’t generally bring us happiness. The experiences we buy do. (If you want to read more about this check out our article on Buying happiness.

Final Thoughts

As mentioned before, if you received a refund, you lost money. But you obviously don’t want to owe either. That’s why it’s important to have a tax person to help you.

Careful tax planning for the year can help you maximize your opportunities to utilize your money and minimize the government’s opportunities to do the same.

Until next time,

Cheers!