What Does a Tax Refund Mean?

Apr 15, 2012

It’s tax-filing time again, and that means many of us are going to get refunds. Is that a good thing? Well, it’s always nice to get a check from the government, but let’s face it: all it really means is that you’ve already paid Uncle Sam more than you ended up owing him. In other words, you’ve given the government an interest-free loan for several months. On the face of it, that’s not wonderful news. But even so, it’s not a bad thing.

First of all, whether you’re someone’s employee and paying taxes through payroll withholding, or you’re self-employed and making periodic estimated tax payments, if you haven’t paid most of what you owe by one of these means, you may be subject to fines and penalties. Since it’s hard to tell exactly how much you’ll owe by the end of the year, you’re usually much better off building a “fudge factor” into your withholding or estimated tax payments. Also, at today’s minuscule short-term interest rate, that short-term loan to the government just isn’t very expensive.

Lastly – and this may well be the more important factor – overpaying taxes throughout the year is a form of forced savings. For many of us, not having the money is the best way to keep from spending it. And if nothing else, filing a tax return is never a pleasant task, but having to do that and realizing you owe Uncle Sam a large sum of money that you may not be in the position to pay, just plain stinks.

In their advertising at this time of year, tax preparation services make a big deal out getting you a refund. They seem to be suggesting that they’ll find savings you couldn’t have found on your own – although that’s hard to tell unless you’ve done your taxes yourself for comparison – and there’s no question that another set of eyes on your tax return can provide peace of mind. But any way you slice it, a taxation system structured so than many of us get refunds does have its benefits.

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