- Tax refunds should not be regarded as found money.
- In spite of that, one year, I treated mine as such.
It's a move I still don't regret.
As a self-employed writer, I'm no stranger to having to pay the IRS during tax season. Although I make a point to pay estimated taxes on my earnings every quarter, it's hard to get those numbers just right -- especially since my income tends to fluctuate from year to year.
As such, the tax refund is a concept I'm not very familiar with these days. Back when I was a salaried employee, I used to get refunds routinely. But since going freelance many years ago, I've owed the IRS money consistently.
One year, however, that wasn't the case. I don't know how it happened, but between increasing my estimated quarterly payments, maxing out my retirement plan contributions, and making other strategic moves with the help of my accountant, I wound up with a refund on my hands. It was shocking, in a good way. And so I took the opportunity to splurge.
Here's why I don't regret that in the slightest.
Found money for me
It's a big misconception that a tax refund is free money. In reality, it's your money you earned but never collected.
It's for this reason that taxpayers are often advised to use their refunds strategically, whether by paying off their credit cards, adding to their savings, or covering essential bills. When I got my refund a few years ago, I broke that rule -- but I felt justified regardless.
For one thing, since I always expect to owe the IRS money come tax season, I make a point to keep extra money in my savings account for that express purpose. In fact, I actually have a dedicated savings account for those tax bills that's separate from my emergency fund.
But that one year, I didn't have to dip into that account. Rather, I had the opportunity to add to my savings. And so to me, my tax refund felt like found money -- even though I knew it wasn't.
But that's not the only reason I felt comfortable taking that cash and using it for a vacation. At that point in my life, I was in a solid place financially. I had no debt other than a mortgage, and I had a large cushion of cash in both my emergency fund and my special tax savings account. I was also on track with retirement savings, having maxed out my contributions there consistently.
To put it another way, I didn't have any financial gaps I had to address. And so I made the decision to use that money to splurge.
Should you spend your tax refund or save it?
If you're doing well savings-wise, don't have unhealthy debt, and are on target with your financial goals, then by all means -- go ahead and spend your tax refund on something fun. But if your emergency fund needs beefing up, you owe money on your credit cards, and you can't remember the last time you put money into your IRA, then you should probably use your refund to address one of those points.
This year, I got the opposite of a tax refund -- I wound up owing the IRS more money than usual. Thankfully, I had enough money in that dedicated savings account to cover that bill. Had that not been the case, I would've dipped into my vacation fund before tapping my emergency savings to cover it. But I'm grateful it didn't come to that.
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