The Great Myth of the Tax Refund

Tax day passed a week ago, and in just enough time for your parents to recover from their sleep-deprived, last minute tax filing, refunds will begin to arrive in mailboxes across the country in a matter of days.

If you turn on the TV or look in the newspaper this week, you’ll certainly notice that stores are especially aware of the additional income shoppers will have access to this time of year, and they want a piece of it.

The average tax refund is approximately $2,500. That’s $2,500 of your money, surplus money that you gave to the IRS earlier in the year. So why do we see tax refunds as free money? Tax refund amounts are often a surprise, and so we rarely budget for them. Alas, when that $2000 check arrives in the mail, the ads for 52” plasma screen televisions and theme park vacations are tempting. But don’t fall for the tax refund trap; it’s your money you’re spending!

Financial professionals often remind us that tax refunds are a product of paying too much to the IRS in the first place, and that we could be making interest of that money if we estimated correctly. But an important factor to remember is that most of us don’t have the self-control to take an extra several hundred dollars a month and put it into an interest-bearing account. It sounds smart in theory, but for many, withholding taxes is a forced savings account.

If you are one of those people who delights in a multi-thousand dollar refund, remember two things: first, that your tax refund is the same money you worked for, hour by hour. Would you spend $2000 on a TV if you realized that you worked for 100 hours just to pay for it? Think before you spend. Second, plan ahead. Before that tempting check arrives in your mailbox amidst commercials begging you to spend it, think about investing it, saving it, or using it for a wise purchase.

This tax refund season, think before you spend. You’ll be happy you did.

For more coverage on the taxes you pay, check out the Biz Kid$ episode, “A World Without Taxes.”