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Making the Case Against Receiving a Tax Refund

NFCC OFFERS THREE-STEP PLAN TO REPLACE DEPENDENCY ON REFUND

Millions of Americans celebrate receiving an income tax refund each year. Many of these same people live each month under the burden of financial hardship, struggling to make ends meet, often falling behind on living expenses and debt obligations.

A recent poll hosted on the National Foundation for Credit Counseling (NFCC) website revealed that a significant majority of respondents, 58 percent, intentionally plan to always receive an income tax refund, unnecessarily allowing Uncle Sam the use of their hard-earned money, only to have it returned to them without benefit of interest.

Not only is the American taxpayer self-inflicting financial pain, they are doing so with intentionality. It boils down to a simple choice of determining if it’s more important to have extra money in their pocket each month or once per year.

The average income tax refund in recent years has been in the $3,000 range, or approximately $250 per month. For many people, that amount can mean the difference between financial solvency and financial distress, yet they continue to have too much money deducted from their paycheck month after month. Further, although well-meaning, many who receive the refund don’t spend it wisely, and even for those who do, once the money is gone, the cycle of struggling to responsibly pay monthly bills begins all over again.

Many consumers argue in favor of an income tax refund saying that it is a forced savings. That is correct, but there is a better way to save. The NFCC advises consumers to implement the following three-step program if they receive a tax refund:

  1. Put the refund into an interest bearing savings account. Upon receipt of the refund, seize the opportunity to establish an emergency savings account. This will protect against the financial unknown and create a position of financial stability.
  2. Adjust W-4 withholding allowances. Although receiving a refund is not a good idea, no one wants to end up owing the government, either. To determine the correct number of withholding allowances, use the worksheet at www.IRS.gov, then submit the revised form to your employer. Know that changes such as the birth of a child, a death, or divorce may impact the number of necessary deductions, thus requiring further revisions. An adjusted form may be submitted at any time during the year.
  3. Responsibly allocate additional monthly income as appropriate. Now that the money that was going to the government is coming to the consumer in the form of a larger paycheck, it is his or her responsibility to make smart decisions regarding how to spend it. Make it a priority to keep living expenses, the rent or mortgage, utilities, and insurance premiums current. The next most important payment is any secured loan, for instance a vehicle payment, followed by unsecured debt such as credit cards. If the savings account has been tapped, replenish it.