Why a Big Tax Return is Bad

While it’s great to see our bank account take a nice jump, I’m going to explain to you why getting a big tax return is a bad thing.

Your Income Tax Refund is an Interest-Free Loan to the Government

You know that thing you complain the most about on your Facebook wall and Twitter tweets? Yeah, the government. For not liking them so much, you tend to loan them a lot of your hard-earned money. When you get a large refund, it means that the government held on to your money over the past year to do whatever it is they wanted. So what do you get in return for allowing them to use your money? You get your money back. That’s it! It was a free loan.

Let me ask you this: does the government ever give you a free loan?

Thought so.

Furthermore, do you know what happens if you owe the government money for a year? Penalties and interest added on to what you owe. Even a low interest savings account gives you more back. Why loan out your money for nothing?!

Inflation is Important

The Bureau of Labor Statistics defines inflation as,

a process of continuously rising prices, or equivalently, of a continuously falling value of money.

What does this mean? It means that a dollar today will be worth less than a dollar one year from now. There’s a nifty little calculator on the BLS website.

If you enter $1,000 for 2010, you’ll see that this has the same purchasing power as $1,037.49 in 2011. That means that you need $37.49 more in 2011 to buy what you did in 2010.

Look at it another way. If you get a $1,000 tax refund for the previous year, it’s really only worth about $963! Just by letting the government hold your money for a year, you’ve lost $37 in purchasing power. Seems like a great deal, right? BARF!

An Offer You Simply Can’t Refuse

People just never learn. Every year, people drool over that check from the government thinking, “haha! I really got ‘em this year!” I can give you the same deal… if not better.

I hereby offer anybody reading this to send me money. I’ll take cash, checks, money orders or even food stamps. Send me as much as you’d like. And I promise – with my right on the Holy Bible (I love Jesus, by the way) – that I will send it back to you in April… without interest.

Sounds pretty silly when you put it that way, right? But that is absolutely no different than getting a tax return from the IRS.

Some people will argue that refunds are a great way to save money. If they never see the dollars in their checks, of course it’s easier to set money aside for, let’s say, that big screen TV that you’ve been eyeballing for the last six months.

OPEN YOUR EYES, FINANCIAL FOOL!

That’s what payroll savings deductions are designed to do! Increase your retirement plan contributions. Buy savings bonds. Or just put that extra $50 per paycheck into a money-market fund.

Tell you what… I’ll ante up my original deal. Not only will I give you your money back, but I will add a gargantuan 1% to your original contribution. That’s more than money-market funds and CDs are paying. You can’t beat that kind of a deal!

You May Have  Tendency to Spend Your Large Tax Return

I hear tons of people say something like, “I can’t wait until I get my tax refund so I can buy…” Getting a fat chunk of change can give someone googly eyes to go spending. If you have the money broken out into small pieces (12, to be exact) in your paycheck rather than one lump sum, you may be less tempted to spend it all on a big purchase.

It’s Your Money!

This is easy — the money is yours. Why wait for it? Folks, if you like lending money out in small pieces just to have it handed back to you in one lump sum at a later point then contact me and I will hold it for you! (I’ll even give you that 1% return.) Seriously. I’d love to have your money growing in my accounts. I’ll give it back to you when I’m finished.

So what do you do now? The goal should be to get as close to zero as possible on your tax return (you don’t owe taxes and the IRS doesn’t owe you a refund). MSN Money has a neat article called Get Next Year’s Tax Refund Now which talks about changing the withholding on your W-4 form so that you can get more in your paycheck rather than pay out more taxes every pay period and get a large refund next year. My wife and I recently changed our W-4 forms and now we are getting an additional $110 per paycheck. That’s $2,640 for the year! Check with a tax professional if you should have any questions.

And please… do not get any more big tax returns. Refunds are bad, bad, bad! Trust me.