I’ve been spending time at Money.Stackexchange as a moderator and top poster. Recently I ran into a bit of pushback on what I thought was an obvious question.
Why does my tax refund need to be as close to zero dollars as possible? Now, of course, it doesn’t have to be anything, but over the years, I’ve written about how to use the W4 to adjust your withholdings to get your refund down to a reasonable number. I maintain that if nothing else, you are lending the government money that could otherwise be used better by you.
Let’s look at two facts that motivate my approach.
This is from the IRS and references data from last year, 2014 returns. I then search for average credit card balance and find
This is where I make an assumption. It’s that those people who owe debt on their cards, at an average of 16% or higher, are among the 83% who are getting these refunds. Remember your Venn diagrams from high school? Do you think most of the 83% getting refunds also owe money on high interest cards?
Another thought, a factoid that has made the rounds many times in the last few years. According to a report by the Brookings Institute, half of US households would have trouble raising $2000 inside of 30 days for an emergency. In this case, it’s not a matter of a better return in the bank, I know rates are near zero right now, nor is it the fact that you should pay off that high interest debt. It’s that half of us don’t have a sufficient emergency fund to handle even a $2000 emergency.
With all this said, the Stack Exchange discussion led me to the Huffington Post article Big Tax Refunds Really Are Good. The author, Mark Steber, is the Chief Tax Officer at Jackson Hewitt Tax Service. One might dismiss Mark’s position as the refund is in his company’s best interest. But, why would that be? What would it take for a few marketing gurus to change their rhetoric from “we’ll get you the biggest tax refund” to “we’ll get you the lowest tax liability possible.” Let me summarize Mark’s 8 reason’s and offer my own counter points to each –
- Getting a $3000 check (the average return) is never a bad thing. (Yes, it’s awful. Why lend the government or anyone your money at zero interest?)
- 75% of us get refunds year after year, can we all be wrong? (Well, it’s over 80%, but yes, I believe that financial illiteracy is rampant, why would it surprise you to find the majority doing the wrong thing?)
- Interest rates at sub 1%. (Indeed, we each have our own opportunity cost. It’s disingenuous to focus on the missed back interest, how about the fact that 1 in 4 employees did not deposit enough to their 401(k) to get a company match. The average left on the table was $1336 according to Financial Engines. A match is an instant 50-100% return, that’s what’s lost.)
- Saving money is tough, this is used as a savings account. (I get that. Is Mark suggesting that someone who is not disciplined enough to save on their own, will suddenly be responsible with this lump sum they get in April?)
- Some portion of people are getting refundable tax refunds such as EITC. (This is true. Some people pay no tax but get money back do to the Earned Income Tax Credit among other credits. And of course, this is not in their control, they are not paying this money in, they have no choice. This point is a red herring, little else)
- Of the three alternatives: owing taxes, landing right on zero or near it, or getting a big refund, you figure out which one is best. (I have figured it out. I’ll make the best use of my money, and can plan ahead. So long as I don’t pay a penalty, I’ve planned well.)
- Getting money back is certainly more palatable than owing. (Mark was running low on ideas, this is a rehash of #6. No new point made here.)
- You earned the money. It is your money. Get and enjoy the money. (Agreed! Over my working life, I got my money every paycheck, and didn’t have to wait to get it back. I’d say it’s your money, don’t let it go.)
What is my motivation here? Only to bring to light the financial nonsense that’s offered under the guise of sage advise. The problem with this discussion is that the audience can be anyone. I focus on a broad audience, not just the top few. Mark’s dismissal of the lost opportunity cost, focusing on the low current rates, implies that he ignores all the other scenarios I presented. If such a thing were possible I’d find everyone who is not getting their company match, and explaining to them they could double their money instead of lending it out interest free. Next, I’d sit with those who are paying 18% or more and not paying their cards off in full. It goes on from there. Why does Mark dismiss the real cost that most of us face? The top 10%ers don’t need to worry about $3K tied up, but they are also more likely to have their finances in order.
Now, are you still so sure a refund is a great thing?