Spread the love















In order to discuss the implications of tax refunds, let’s say you just loaned money to a person who offered to pay back both the principal and the interest within a year. Sounds pretty good, right? What would happen if that person paid back only the principal but not the interest. That wouldn’t be fair at all.

Well that’s exactly what happens when you get giant tax refunds every spring.

You’ve essentially overpaid the government what you owed in taxes. In other words, you allowed the U.S. government to borrow your money. One year later, they paid you back in principal only. That’s the problem with tax refunds.

My Case: A $2,000 Tax Refund

Before discussing larger implications about taxes and finances, I first want to discuss my tax situation because it might be relevant to you.

I just received a tax refund of roughly $2,000. In other, I overpaid my taxes by $2,000 last year.

The reasons that I received this tax break are actually pretty common, which is I why wanted to discuss it. On the one hand, I paid taxes through my work payroll like millions of Americans. However, I also paid quarterly estimate taxes because of side gigs that I do. In addition, I received a sizable tax break via contributions to my health savings account. The result was that tax refund.

While it is good that I didn’t owe $2,000 to the government, it isn’t good that I received so much money back.

Tax Refunds Are Not Gifts

Most Americans think of tax refunds as gifts, but that couldn’t be further from the truth. The IRS essentially held your money hostage for the past year and they now paying you back.

The average tax refund in 2018 was over $3,000. That means that the average tax paying American who got a refund lost an average of $250 every month to the government. Can you imagine if you got paid an extra $250 per month? I bet that would really help out.

“Your goal is not to get a tax refund,” said financial broadcaster Dave Ramsey. “All that means is that you’ve been overpaying all year, so you’ve got a savings account with the IRS at 0 percent.”

The Alternative To Tax Refunds

What would you do if you kept the $3,000 instead of overpaying your taxes? Well, you could take a step closer to financial freedom.

First, you could pay off your debt. This includes both principle and interest.

Second, you could start an emergency savings fund, if you don’t have one already. You emergency savings fund should be at a minimum three to six months worth of expenses.

Finally, you could have also used that money to either invest or save for retirement. 2017 was an incredible year with the stock market, and you could have made a better return if you had the $3,000 with you.

The Solution

First, it is OK to get a tax refund that will cover the cost of getting your taxes done and filed. But beyond that, you really don’t want to get any tax refunds at all.

If you pay taxes through your employer, you should contact them. Evaluate your W-4 and consider changing your withholding for your paycheck. If you pay quarterly taxes for self employed income, then maybe pay a different amount in the future. Either way, speak to your accountant today so that you won’t have to loan the government $3,000 a year. Make sure you also check out the IRS tax refund schedule 2018.