Quantcast

Tax refunds can be a bad investment

Published: Tuesday, Jan. 22 2013 11:30 a.m. MST

This photo provided by the Internal Revenue Service (IRS) shows National Taxpayer Advocate Nina Olson. The nation's tax law is so thick and complicated that businesses and individuals spend more than 6 billion hours a year complying with filing requirements. That's the equivalent of 3 million people working full-time, year-round. A report by Olson says: "The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,"

Christopher Germano, AP

Enlarge photo»

Getting a tax refund at the end of the year, though exciting, is a bad use of money, according to an article by Daily Finance.

The average tax refund is $2,700, according to CNBC. By overpaying in taxes for 12 months, you lose interest on that money that could be working for you. It’s like an interest-free loan to the government.

Loosing that money for 12 months is $225 less each monthly take-home. And while it might be thrilling to receive a refund at the end of the year, that money could help avoid financial struggles year round.

“If you are scrimping to get by and piling up debt throughout the year, but getting a large tax refund every spring, adjusting your withholding to get more money in each paycheck is a better way to go," said Greg McBride, senior financial analyst at Bankrate.com, to CNBC. "It will ease your financial burden and reduce your stress throughout the year."

Paying just enough taxes throughout the year is what an article from the Wall Street Journal suggests. But even though it is an advantage to have the money throughout the year, emotionally Americans prefer getting tax refunds because of the emotional boost it provides.

Overpaying taxes is also done to avoid unpleasant surprises at the end of the year. It is also the way some people save when they don’t trust themselves to put aside money. Emotionally, the Wall Street Journal found that Americans enjoy getting a refund more than extra money in a paycheck.

For those unable to save, overpaying in taxes can be a benefit to them, said Bob Meighan, the lead CPA for The American Tax & Financial Center at Turbo Tax.

“It's probably one of the only and best forced savings mechanisms for many low-income households because it does allow them to save without compromising on their regular take-home pay," Meighan said to CNBC.

EMAIL: alovell@deseretnews.com

Get The Deseret News Everywhere

Subscribe

Mobile

RSS