Beware: AUTHOR HAS BEEN TRIGGERED

I am strangely enraged by people who defend this weird desire to have a big tax refund. They tend to say, “I like knowing there’s something coming my way in April.” This is largely anecdotal, but I hear it all the damn time.

Earth, to you Big Refund People: Your argument is terribly flawed and this is a supreme example of what’s wrong with personal finance in America.

Disclaimer: None of this massive rant applies to lower-income folks who may have tax complications due to the Earned Income Tax Credit or other various matters related to income uncertainty. They have it hard enough and don’t need me sending bad karma their way. No, this is for the six-figure earners I know. Yeah, you guys. 

I was compelled to make this post after seeing this CNN article, knowing that most people will see it in a negative light:

As reported by CNN, the average tax refund last year was $2700. But we also know that 41% of Americans cannot afford an unexpected $400 expense.

Translation: Refunds are huge, yet people are still broke.

People think they’re being responsible by setting themselves up for a large tax refund. In reality, this is a tax-free loan to the government and has basically no chance of being utilized in a smart way. Full stop. If this is your saving strategy, I am here to tell you it is not a good one. It is a band-aid intended to cover up the bullet wound that is your financial discipline.

If you skip lunch and then eat two dinners, you won’t be losing weight. People are convincing themselves that this is an effective financial diet.

Some may think that they’re performing some kind of a preventative financial measure because they know they aren’t good savers, and they would immediately spend the extra money every paycheck if they withheld a more appropriate (smaller) amount for taxes. HELLO? If you don’t think you can handle seeing a few extra dollars arrive with every paycheck, do you really think you’ll wisely allocate a one-time lump sum of thousands of dollars? I get the logic, I really do. But it’s wrong. People, stop doing this.

There’s also a big difference between making sure enough is withheld for taxes (and generating a small refund, which is fine) and the aforementioned tax refund-as-a-savings-account delusion. A small refund is OK – it’s a margin of safety against paying a penalty for underpayment. You never want to owe money at tax time. But setting yourself up for an obvious, huge refund is just silly. If you don’t have the discipline to save money weekly or bi-weekly, you certainly don’t have the discipline to save your mega refund.

Good personal finance rule: Receive interest, don’t pay it

With interest rates now being much closer to being “normal,” it’s easy to once again make the argument about passing up interest on the amount of these mega tax refunds.

It’s dead-simple to earn an FDIC-insured 2.20% APY in a savings account right now (2023 update: more like 4.00% APY). Given that $2,700 refund, people are technically leaving about $60 $108 on the table over the course of the year. It’s nothing major, and not even close to being the real argument here, but it’s not nothing. Call it a nice dinner out to celebrate making a wise tax decision. To me, that’s worth it.

In summary, Uncle Sam will always get the exact amount he’s owed. No matter what. There is no free lunch. Should people decide to convert this process into a twisted game of delayed gratification, then, well, that’s on them. But don’t say I didn’t try to change their mind.

Rant: Over.