Why Your Tax Refund is Making You Sick

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Millions of Americans are looking forward to receiving a tax refund this year. In fact about 80% of tax filers received a refund last year, and the average amount was almost $3,000. But what many Americans don’t realize is that these refunds are making you sick… all year.

Nothing is more exciting than getting a sudden windfall, especially if it is for $3,000. Think of all the things you could do with $3,000 right now:

  • Pay off a credit card
  • Pay for a vacation at the beach
  • Use it for a down payment on a car
  • Restock your wardrobe
  • Put new floors in your kitchen
  • Fix the leak in the garage
  • And so on…

And that sudden excitement that you feel when you discover that you are about to receive $3,000 is like winning a small lottery. In fact, you almost cannot wait the two or three weeks it will take for the refund to land in your account. But you shouldn’t have to wait at all. Come to think of it… why didn’t you have it all along?


Is receiving or winning $3,000 a great thing? Yes. Is getting a $3,000 tax refund the same as receiving or winning $3,000? No. We already looked at ways to enjoy the $3,000. But this is your money. What you are doing, for better or for worse, is creating a delayed spending account – or annual savings account – with the government. Similar to the Christmas Accounts that some banks to credit unions offer, where you set money aside all year earning a very small amount of interest, so that in November you will have a chunk of money to spend on Christmas gifts. The main difference is that the Christmas Club Accounts at least pay something in interest. There is also an immediate plan for how you are going to use that money.

When you receive a $3,000 refund that means you were saving $250 each month throughout the year. Now, think back through your last year. How many times did not have enough money to do the things that mattered to you? Was there a birthday party you could not afford for your child? Of perhaps a fun weekend getaway that was just outside of your budget? These are all opportunity costs. While it is true that an interest free loan to the government in the form of a tax refund is not much different from the 0.1% you are likely to earn on a savings account, you have to also consider your other alternatives.

How many times were you stressed about money last year? How many arguments did you get into with your spouse or partner? How many times did you feel guilty about what you could not provide? Were you feeling deprived or embarrassed? Did you have to pass on a happy hour or lunch with coworkers or a friend’s wedding you had to skip or go cheap on the gift? There are 11 months out of the year where you were depriving yourself of $250 each time and for what? So you could get $3,000 of your own money at one time?

Okay, let’s talk dollars. Say you had a credit card at 16% interest. Instead of paying down that credit card, you paid only the minimum all year. Now that you have the $3,000 refund you pay down the card by $3,000. That should make you feel good. But what if you would have put that $250 on the card each month throughout the year? You spent an additional $230 on interest because you paid interest all year and then put the $3,000 on the debt at one time. If you had put $250 per month, you would have paid $230 less in interest on that debt last year.

Refunds can be a great way to force yourself to save for something such as a vacation, but only if you budget correctly, you consciously make the decision to put that money into your taxes so you can get a refund, and you stick to your plan when the refund arrives. Otherwise, stop paying 16% interest and giving the government your money for 0% interest. Stop allowing yourself to be stressed, to miss out, to feel guilty, or to deprive yourself for 11 months of misery, just to get the excitement of getting your own money back for a brief moment… before you spend it and start again.

Instead, this year, after filing your taxes with TurboTax or some other tax software, simply fill out an estimated tax form for next year and see how much tax you will owe. Divide that number by the number of paychecks in a year. If you have over $100 more than that coming out of each paycheck, then you can make some adjustments to send less to the IRS and more to yourself. And remember, for most people, a $250 per month increase in take home pay is like getting a $4,500 annual pay raise.

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The three authors, Bill Pratt, Mark C. Weitzel, and Len Rhodes, are industry leaders in personal financial education. Together, they have a combined 75 years of experience in banking, economics, and entrepreneurship. Now, they teach thousands of students personal finance concepts and decision making skills, author textbooks and public press books on personal finance, and help schools develop innovative personal finance literacy programs. Recently, they were instrumental in developing a personal financial management certification program for leaders in higher education. The other books in The Money Professor series include The Graduate’s Guide to Life and Money and Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt & Ca$h. Their books, lectures, and programs give students, parents, and educators the tools and knowledge to make good financial decisions all their lives.