Your Income Tax Refund is NOT Free Money

Are you one of those people who can’t wait for tax season to get here? Do you do your taxes early in anticipation of your big refund? Do you already know how you’ll spend it before you do your taxes?

If you get a tax refund every year, there is something you should know. Your refund is not free money. Well, it’s free to the government, but it’s actually costing you money. Everything penny you get in your refund check is money the government has been borrowing from you all year long without paying interest. Would you put your money in a Prize Savings Account if we didn’t pay you a dividend on your money? Of course not. Don’t the let the IRS do that either. Instead of taking the big refund, take bigger pay checks.

I am not a CPA, and legally, I cannot give you tax advice. I can, however, tell you what I would do, and you can take that information to a tax advisor to see if it works for you. The first thing I would do is adjust my W2 form at work. This is the form you use to tell your employer how many dependents you have. Your employer uses that information to calculate how much tax should come out of each paycheck. If you are getting a huge refund every year, you may need to claim more dependents. The more dependents you have, the less money they take out of your pay, and the more money you come home with on pay day.

Now, I know there are some people who use their refund as a savings account. My sister tells me every year that she would never save money if it wasn’t for her tax refund. Perhaps you feel the same way. If so, think about taking that extra money in your pay check and having it deposited automatically in a special savings account that penalizes you for withdrawing the money, like a Certificate of Deposit. These accounts generally pay a higher rate than a regular savings account, but they require you to keep the money in the account for a specific time period. If you withdraw it early, you lose money.

Another option is to have that money deposited automatically to a Christmas Club account. Many people use this account to save all year long for their holiday shopping, but you can use it to save for anything. In November, the credit union gives you all the money in a lump sum. It’s almost like getting a huge tax refund, only you’re earning interest on your money. Even with low savings rates, you’ll still make more than you would by letting the government use that money.

Remember, this is your money that you earn by working hard. Talk to a tax advisor about how you can put more of it in your pocket.