I Almost Never Get a Tax Refund. Here's Why That Doesn't Bother Me
KEY POINTS
- A tax refund is not free money from the IRS.
- You're better off getting paid more upfront than struggling with cash flow issues.
I'd rather keep more of my money upfront.
This past April, I was talking to some friends who were sharing the refund amounts they were entitled to after completing their tax returns. When they asked what my refund looked like, I laughed.
See, as a self-employed writer, I pretty much never get a refund. Quite the contrary -- even though I do my best to estimate my tax liability during the year and make quarterly payments to the IRS, I still inevitably end up owing money each April.
Part of the reason is that your tax liability doesn't just boil down to the amount you earn from the work you do. It's also a matter of how much interest you earn in your savings account and what gains you enjoy in your brokerage account -- and those things can be hard to estimate ahead of time.
But while part of me does sometimes get jealous of my friends who get a check or direct deposit from the IRS each April, ultimately, I'd much rather get more of my money upfront and write out a check during tax season. And if more people took that attitude, they'd probably have fewer problems with cash flow.
A refund isn't free money
It's a big misconception that a tax refund is a gift from the IRS. It's not. Any time you get a refund, that money comes to you because you earned it during the year but didn't collect it when you should have. And in some cases, not getting that money upfront could mean struggling to pay bills or landing in debt.
Let's imagine you got a $3,000 refund this tax season, but that last year, you also had a month where you were $250 short on your bills and had to charge some expenses on a credit card whose balance you're still paying off. Had you gotten your money upfront instead of waiting for a refund, you probably would have avoided that debt.
And that's why I don't mind writing the IRS a check every April. I mean, sure, I'd rather not do it. But the way I see it, I'd rather get more of my money as I earn it as opposed to having to wait for it.
Don't lend the government money for free
When you get a tax refund from the IRS, it represents a loan you gave the government for nothing in return. After all, if the IRS issues your refund promptly, you're not entitled to any interest on it -- even if you were initially entitled to that money months prior.
If you routinely get a large tax refund, it may be time to adjust your withholding so you get a larger paycheck each month. Will that potentially mean having to write the IRS a check during tax season? Maybe. But if you set extra money aside for that possibility, it won't have to be a problem. And that way, you'll have more money on hand for your needs (including unplanned expenses and emergencies) as they arise during the year.
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