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Is Getting A Large Tax Return Really a Good Thing?

When tax time rolls around each year, you either dread it because you owe money or are excited because you are getting a large refund. People tend to think of refunds as free money - money that can be put toward a major purchase or a vacation, and most people want to see a large refund check coming their way. However, a large tax refund isn't free money and. Here is a look at some of the reasons why a large tax refund may not be as great as it seems.

Lending The Government Money Costs You

A tax refund is a glorified, interest-free loan that you pay the government. Essentially, the government is borrowing money from you through the tax withholding taken out of your paycheck each week. When you get your annual refund, they are just giving money back to you that you overpaid to them throughout the course of the year. Of course, you aren't receiving any interest for lending them the money. If you take out a loan, however, you will make interest payments when you pay it back. The same isn't true of the government.

You would be better off paying less in taxes throughout the year and keeping that extra money that you see in your paycheck in a savings account. This way, you can collect interest. The larger the refund you receive from the government, the more you interest you lose out on. If you are getting a refund over a couple of thousand dollars, you could have made out pretty well if had that money to put in a CD or a savings account.

Not getting interest isn't the only thing that hurts you. The dollar loses value every year thanks to inflation. Think about what happens when you go to the grocery store. Prices are always increasing. Therefore, you have to spend more money to get the same items on your everyday list. Inflation is an ongoing process. However, the government doesn't account for that with your tax return. They are going to give you back the same amount that they borrowed. The only problem is that that amount isn't worth quite as much as it was when you gave it to them.

Temptation To Spend Money

There is nothing wrong with going on vacation or buying something you normally wouldn't get when you get a tax return. Whenever you receive a large amount of money at once, it is very tempting and very easy to spend it. However, that isn't always a good thing. Think about times later in the year when you are worried about cutting yourself short with money – if you change your withholding, you'll have more money in your paycheck each week. You won't get a large refund, but you may find that your bills are easier to pay and you have a little less stress from week to week.

Tax refunds are not free money. A tax refund is your money. This year, think about how you wish to pay your taxes and decide if giving the government an interest-free loan is really the best choice for you.

If You Need Help

If you need help making your paycheck stretch a little farther and you have more debt than you can handle, contact the nonprofit credit counselors at Advantage CCS today. We can get you started on a debt management plan and help you learn to spend and save money wisely, get out of debt, and get in control of your finance.