Yes, Tax Refunds ARE Evil

Do you get a large tax refund?

Do you spend all year living on less just to see a bigger number on your income tax return next to the words “amount to be refunded”?

Are you one of those people that struggles to pay utility bills or rent all year long, only to take that large refund and spend it on a vacation?

Or perhaps some large purchase that you wouldn’t otherwise be able to afford?

Well, they aren’t inherently evil, but the simplistic rationale and ways that people go about thinking about and handling tax refunds certainly can be to their financial states.

I read an article by Dave Carpenter, a personal finance writer for The Associated Press on retirement and other topics, which landed on MSN Money’s Tax Tips page (sorry, MSN Money has totally removed a lot of their content) about tax refunds and how they aren’t always evil.

His main points for tax refunds being good are called:

• avoiding a debt trap
• providing a welcome windfall
• protection against tax surprises
• forcing people to save money
• little lost opportunity cost

Sure, it’s great to be chipper and look at the bright side of things, but it’s not always helpful.

Sometimes, people need to hear the truth even if they don’t want to hear it.

This story is so one-sided that I couldn’t do anything except shake my head.

While Mr. Carpenter briefly mentions putting “all the extra dollars in every paycheck to work instead of waiting for a fat check the following year” he simply brushes the concept aside and moves on to the candy-coated greatness that is the tax refund.

It seems more like an article aimed at placating the readers and going along with what the popular sentiment regarding this issue is, rather than continuing to explore his statement further, which could be more helpful to people, albeit potentially less popular with the reading public.

He specifically mentions these being “challenging, low-interest-rate times” in defense of counting on getting a tax refund.

How about all of the people who are in debt and can’t get out from under it because they can’t accelerate the payment process.

Well, if they understood paycheck calculations and would adjust their withholding, and create more cash flow throughout the year, they would be able to pay off more of their debt at a faster rate.

Even if a large refund is applied to debt, the impact of that payment is significantly reduced due to all of the months that interest was allowed to compound on outstanding balances.

His talk of opportunity cost looks at the wrong side of the equation.

The focus on the matter is not worrying about lost possible interest income since rates are so low.

True, the reward for putting the money into a CD ladder or savings account is next to nothing, but how about looking at the opportunity cost of not paying down credit card debt.

The reward of paying more toward debt is huge–up to 30% in many instances depending on the interest rate of the loans!

That doesn’t even take into account being able to stop (or even avoid completely) having debt collectors calling constantly or the negative impact on credit scores.

Even more important than the interest being earned on savings, how about just convincing people to save, period!

How low does the national savings rate have to go before people start to realize how big of a problem it is?

How do you calculate the “opportunity cost” of not having an emergency fund?

Plus, for all of the people who get into tax trouble, I would venture a guess that the majority of them, when deciding how to file taxes, aren’t using a tax preparer.

Instead, they try to save a buck by taking the DIY approach.

Tax attorney Lu-Ann Dominguez is quoted as saying she dealt with “…painful cases all the time in which debt issues snowballed because of insufficient withholding.

Many of her clients weren’t able to write a check to send the IRS for what they owe, so they didn’t file.”

By spending a little bit of money to get a qualified tax preparer to handle the tax preparation, they would not only get a tax return but also someone who will check in on them periodically to see if anything has changed for tax planning purposes.

Professionals also understand safe harbor rules for withholding and how to insulate clients against underpayment penalties.

At the very least, the people would have someone who they can call to ask about the ramifications of certain decisions they may make.

This is the problem with people–many would rather feel good about approaching their tax situation as opposed to doing the smart thing.

They suffer and struggle in order to “save” up for a big purchase or vacation rather than use the resources they are given to get out of their current poor financial situations.

And the media seems to be more interested in people like them rather than being truly informative and helpful.