Why I Don't Like A Big Tax Refund

In 2007, the IRS issued 110.8 million refunds equal to $280.4 billion, or an average of $2530 per refund. Through February 22, 2008, the IRS reported that the average tax refund is at $2708 for 46.9 million returns filed.

In my discussions with people that have large refunds, they like it because they feel it is an effective way to save. If the money had not been withheld by the IRS, it would have been spent. Thus, a refund is a great windfall. Occasionally, I ask, "Would you be interested in reducing your withholding and getting an extra money each month, or do you prefer to get a large refund?" The answer is 100%, " I prefer getting a large refund."

While tax withholding may be an effective way to force saving, it not an effective way to manage money. First, the IRS does not pay interest. If people had the amount over withheld deposited each month to a savings account and earned 4%, it would add up to $5.2 billion of interest payments. For reference, this amount is greater than the profits of 19 of the Fortune 50 companies in 2007. Second, people lose the use of their own money from a month to over a year. They need to wait until the following year to get a refund from the previous tax year. In some cases, these people pay finance charges for a loan against their own tax refund. Getting a big tax refund is like lending a lot of money to someone for free.

My preference is to owe a little bit when filing my tax return. That way I benefit from having my money to use before sending it to the government on April 15th.

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This is not financial advice. Please consult a professional advisor.

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