Found money is really so much more disposable than earned money. It really is easier to spend “found” money on something fun, whereas earned money feels like it must be treated with extreme prudence. A tax refund can really feel like found money and often it gets treated as such. I know many friends, clients, and even myself have spent tax refunds on fun purchases like electronics and vacations. I get it. It's nice to feel like once a year you're getting a little windfall that you can spend on something fun, but I’m here to tell you there are good reasons to not want a refund.
1. This Is Not Found Money
A refund is your money being returned to you. You earned those dollars through your various income-producing efforts. The act of a refund is simply a return of the tax dollars that you OVERPAID. By overpaying on your taxes throughout the year you have simply offered the government an interest-free loan. Now I know we are all exemplary citizens, but to offer anyone an interest-free loan (especially Uncle Sam), while inflation is over 7% is foolishly generous.
2. Opportunity Loss
Instead of offering the government an interest-free loan, you could have saved and/or invested those dollars. The bank is not going to give you a whole lot of interest should you choose to keep those extra funds in your savings account, but in case of an emergency or opportunity, the funds would at least be accessible. Alternatively, you could invest those proceeds in a diversified portfolio throughout the year (and over a number of years) that could certainly produce a lot more “found money”.
3. The IRS And State Timeline
Very rarely do I end up with a refund. This is by design as I try to not owe too much but also not receive a large refund. Last tax year, my estimates were a bit off and I was entitled to a State of Michigan refund. Once my return was filed I expected to get my refund. I was wrong. The State reached out to me via mail and informed me that I was undergoing a correspondence audit. In about 6 weeks, I was notified that the audit was clear and I was good to go. Guess how long it took for me to receive my refund…. 12 weeks!
So, a mere 18 weeks after my return was filed, I received my refund. Now, thankfully, I was not in desperate need of these funds, but it just goes to show that I would've been much better off needing to pay a small amount of money (that I had saved) versus the government owing me (and not in a hurry to pay it back).
I understand wanting a refund, but at least in this humble advisor's opinion having your money in your pocket is much better than a government I.O.U.!
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Written by Brice Carter