The Case for a Big Fat Tax Refund

I just finished my taxes. I need to have an accountant look at them, but I’ll be getting a rather large tax refund.

If my math is right (and only my accountant can let me know if it is) then my refund will be nearly $8,000. The first thing I did was talk to my employer to see how many exemptions I was claiming, and adjusted those so that I won’t be getting that much back next time.

Everyone says you don’t want to give the government an interest free loan – you want to keep the money each month.

Certainly, it would have helped me reach my goals faster in 2012. I would have paid off my student loan last year.

But there’s a flipside. Last year, I hustled to earn extra money to meet my savings goals. I wonder if I would have been so diligent if there were more money coming in. Living lean means picking up extra work whenever it’s offered because I was heads down determined to get out of debt and start making my money work harder for me. Would I have done that if I hadn’t been living so close to the margins?

It’s hard to say.

I think that the 2013 version of myself, the one who writes about personal finance, logs into Personal Capital three or four times a week, and has six or seven savings goals, should not get a huge refund.

On the other hand, tax refunds have been really useful in my life. In 2010, it was the tax refund that allowed me to put money down on a used car. In 2012, the refund was almost the exact amount of the remaining credit card debt. This year, I’ll use the refund to finish paying off my car.

Who Should Get a Big Fat Tax Refund?

I think most people in the beginning stages of taking charge of their personal finances (just out of college, first real job out of college, or starting to pay off credit card debt) should claim no exemptions, and therefore get the maximum amount taken out of their paychecks and loaned to the IRS.

Because the IRS gives it back.

Sure, not with interest.

But the group of people I’m suggesting go this route are not earning interest (or much) anyway. And taking zero deductions will make them feel more poor than they are. Which will make them live more simply. They will be less tempted to splurge.

Then, at the beginning of the year (right after they get their documents from their employer if they want!) they will get a refund.

Then, in an ideal world, that refund will go directly toward long-term savings goals.

Or not!

Sound Silly?  This Isn’t For You

You can make more money in the stock market. I get that. I really do.

But lump sums can really help those of us living in the margins (for whatever reason!).

And, really, I’d recommend it to most people. Except those who are making plenty of money and saving 50% of their after-tax income.

Because “high interest” savings accounts are ringing in at around 1%, if you’re lucky.

And truly, an extra few hundred dollars a month could get you into the lifestyle inflation that everyone warns against. You’d spend it without even noticing.

What I Plan on Doing With My Refund

When my refund comes back, my bank account will be fatter than it’s ever been. And that worries me a little bit. I’m frugal by design, but I’m frugal because I need to be able to stretch a dollar. I don’t want to relax that attitude, and end up going out to happy hour instead of go grocery shopping, simply because I might feel like I can afford to.

So, I will be hiding money from myself. Not in my mattress, no. But I’ll pay off my car loan, then I’ll put the rest into my IRA, and be maxed out (or darn close!) for the year.

Then I’ll open a “high interest” account at a different bank, and put my savings there. That account will be hidden from my Mint. Out of sight, out of mind, right?

I understand the real value of living simply and being frugal.

I just know that in order to achieve my goals, I need to create systems to trick myself into saving money.

What do you think, will you change your withholding? Do you like to get a big refund?