5 Reasons You Might Regret Getting a Tax Refund
Getting a tax refund is one of the big financial highlights of the year for tons of Americans. According to a recent survey from Jackson Hewitt Tax Services, many consumers want to get their refunds early in order to prepare for 2023 holiday shopping. Whatever one’s desire for one’s tax refund, there are few, if any, who would turn their nose up at the little windfall of cash, particularly amid a looming recession, mass layoffs and sky-high prices at the grocery store.
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But is a tax refund a good thing? Tax planners and other finance experts assert that, actually, it isn’t. Many conclude that it’s better to owe than to receive when it comes to the IRS.
“If you ask me as a money coach and personal finance expert the question: Which is the best tax strategy? To get a refund or owe taxes, I will suggest that It is smart to owe money to the IRS rather than get a refund,” said Ohan Kayikchyan Ph.D., CFP, the founder of Ohan The Money Doctor.
Why is this the case? Let’s explore the top five reasons why you may regret getting a tax refund.
You Missed Out on Earning Interest
One thing that people may not immediately realize is that when they get a tax refund, they’re getting back money they lent the government free of interest for a year. That’s a pretty bad deal. Who agrees to an interest-free loan? Answer: Every American who gets a tax refund.
“The biggest regret in my view is that these extra funds were tied up and not earning you interest through a high-interest savings account or in an investment,” said Gates Little, president and CEO of altLine at the Southern Bank Company. ” Many high-interest savings accounts calculate interest monthly, meaning your money could have been passively growing instead of being tied up in tax purgatory. Investments can sometimes be calculated quarterly or twice a year, so you are missing out on the benefits of compound interest if your money is being invested in a lump sum instead of gradually throughout the year.”
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You May Be Withholding Your Own Income From Yourself
Getting a big refund? That may mean you’re having too much withheld from your paycheck, which means you’re essentially stiffing yourself of income throughout the course of the year.
“If you’re receiving a large tax refund, it might be because you’re having too much money withheld from your paycheck,” said Michael Ryan, a financial coach. “This could be because you’re not taking advantage of all the deductions and credits available to you, which could result in a lower tax bill and more money in your pocket throughout the year.”
It Could Lead To a False Sense of Sudden Wealth
Though this reason isn’t strategic so much as it is psychological, it can still be detrimental. A tax refund, which is essentially a micro windfall, can throw your budget off and give you a false sense of wealth that can potentially lead to overspending.
“The problem with receiving a fat refund check is that it can also feel like ‘free money’ to a lot of people,” said Lucia Jensen, CEO of WeLoans. “And the problem with this is that it becomes very easy to start spending it on discretionary expenses like a short vacation, luxury item, etc. In other words, getting a large tax refund can often be a major source of emotional temptation, especially for those that have been restricted financially over the past year. As a result, it is not uncommon for many people to neglect using the money on useful things like paying down debt, saving for emergencies, etc.”
It Could Increase Your Risk of Being Audited
This one is more unusual, but it happens, and when it does, it is certainly a cause for woe.
“If your tax refund is too large or the IRS suspects any fraud or mistake on your return, they may choose to audit you,” said Dana Ronald, president and CEO of Tax Crisis Institute. “This could cause a delay in receiving your refund and be a headache for taxpayers who are not prepared for it.”
A Big Refund Means You Planned Poorly
Getting a hefty tax refund may feel like an achievement, but in the world of taxes, it’s actually a hallmark of poor planning and of not having your financial ducks in a row. And it means you overpaid, which is never a good thing.
If you plan your taxes better, you will have that money before tax time — as you should. You might want to consider working with a tax expert to determine how to best adjust your taxes so that you’re getting paid when you should.
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This article originally appeared on GOBankingRates.com: 5 Reasons You Might Regret Getting a Tax Refund
