You’ve heard that one before, right? It’s the sort of obnoxious pronouncement I would have made until, well, last week. There’s no shortage of pundits who’ll lay the no-refund gospel on you: just try Googling “giving the government an interest-free loan.”
All this haranguing has had absolutely no effect on the US population: the average refund has hovered around $3000 for the last three years, according to the IRS.
Well, I’m abandoning the Church of No Refunds (nickname:” the Zeroes”). Here’s why.
Paying the right amount of tax is too hard
Even when I was talking a big game about never getting a refund, my 1040 told a different story. In the past three years, my wife and I have gotten a $425 refund and a $1500 refund. Then, last year, we owed $1200. In fact, we underpaid so much last year, we were assessed a penalty…of $1. Seriously.
If only one spouse in your family works, and they receive a W-2, and you know ahead of time what tax credits you’ll be taking in the coming year, and there are no changes in the tax law, it’s easy to have a near-perfect amount in taxes withheld from your paycheck. Just use the IRS Withholding Calculator, submit a new W-4 if necessary, and you will be welcomed into the arms of the Zeroes.
Here in the real world of self-employment, two-income families, taxable investments, stimulus bills, and health care credits, you’re lucky to get within $1000 either way.
I thought I could do better. Last week I sat down with a sheet of liturgical documents (aka IRS worksheets) to try and estimate my wife’s tax and my self-employment tax down to the last dollar. After three hours of this, I was desperate for some tax relief (aka beer).
An interest-free loan isn’t so bad when the alternative is interest-free savings
Remember the good old days? I mean early 2008, of course. People had friendly debates over whether there was a housing bubble, and online savings accounts paid over 5% interest.
Back then, it might have made sense to take care not to (say it with me) give the government an interest-free loan. That $3000 average refund comes out to $250/month. If you set that money aside of the course of the year in an account paying 5%, by the following April you’d be ahead $122 compared to getting a refund.
Nowadays, give me a break: at 1% interest, you make $24.
’Tis better to receive than give
Even people who warn against tax refunds break out in stupid grins when they receive one. Similarly, having an unexpected tax bill hurts, even if you have the money set aside to pay it. (And plenty of people don’t.)
Furthermore, there’s some evidence that people use their tax refund for good, not evil. In a survey last year, Bankrate asked Americans how they’d be using their tax refund. Over half (58%) said they’d save it, invest it, or use it to pay down debt. If the money had shown up biweekly in these people’s paychecks instead of all at once in April, would they have deployed the windfall to similarly angelic ends? Of course not.
Most personal finance articles go something like this: you, the reader, are doing something wrong; I, the writer, will explain how to do it right. Consider this an antidote. Honey, you were right and I was wrong. I owe you a cold one. (Yes, I always call the American taxpayer “honey.”)
After wrangling with IRS paperwork for hours last week, I determined that I’m behind on estimated tax payments again this year. Great. So I went to my favorite personal finance discussion site, the Bogleheads. These people are much smarter than me and are particularly gifted in the area of taxes. Are they parishioners of the Church of No Refunds?
Nope. Mostly, people just like to get within $1000 either way and avoid paying a penalty.
If it’s good enough for them, it’s good enough for me. Next year I’m doing what normal taxpayers do. I’m going to deliberately overpay.