It’s tax season. So tax is a hot topic of conversation.
Unlike most people, I don’t like tax refund. While most people are excited about getting their tax refunds every year, as if they win a lottery or get a gift from Uncle Sam, I am happier if I have to pay Uncle Sam every April.
Does it sound odd? Let me explain.
A tax refund is not a gift from Uncle Sam. You get a refund because you overpaid the tax in the previous year. You give money to the government for use at zero interest rate. Now you are getting your overpaid money back.
If you put your money in the bank, you expect to receive some interest in return. But if you give money to Uncle Sam, don’t expect to receive a penny of interest.
In addition, you don’t automatically get your money back. You have to file your tax return to ask for the money to be returned to you.
The average tax refund in the last two years is about $3000.
What can you do with the $3000 you give Uncle Sam for zero interest?
First, you can pay down debt, such as your credit card debt which usually have very high interest rate, your mortgage, or your car loan.
Second, you can put the money into savings to build up an emergency fund, while also earning some interest.
Third, you can invest the money for retirement or other long-term goals.
Whatever you do, your money is working for you every month instead of working for Uncle Sam.
The one argument I hear often for preferring a refund is: “If I receive the money in my regular pay check, I will just spend it.” Then have the money deducted automatically from your pay check and put it into a separate account.
When it comes to finance, we need some discipline, self-control and delayed gratification, in addition to some knowledge and common sense.
In the last 20 year of my filing tax returns, I rarely got a refund. I usually had to pay some federal and state taxes. My goal is not to get a big refund, but to have the smallest refund possible so I can keep more of my hard earned money for the year, or to pay the government, but not as much as I would have to pay a penalty.
If you have been getting a refund every year and want to reduce refund and increase your take-home pay, simply contact your payroll office to change your withholding and adjust your W-2, so less money is withheld each month for taxes.
Remember a tax refund is not a gift from Uncle Sam. It’s your money, and you should keep it.
For me, the hard part every year is not paying tax and writing the check to Uncle Sam, it is to get my act together and to actually file the tax return. Doing tax return is such a dreaded task, I often procrastinate it and wait till the last week or last weekend before the deadline. Since there is no incentive for me to file my tax return early, I will wait as long as possible before I have to write my check to Uncle Sam.