Tax time is a funny time of year. I often spend the weeks leading up to April 15th dreading the task ahead. The day I have my taxes done, the dread turns into fear – will I owe anything? Am I about to go broke in five minutes? Then, if I find out I’m actually getting a return, trepidation turns into excitement: what am I going to do with my newfound chunk of change??
This emotional tug of war I play every year is admittedly an unhealthy approach to both taxes and personal finance in general. Being in control of your money means being prepared for the unexpected and even having ideas in mind if you come into a windfall. However, I don’t think I’m alone in this approach. In fact, recent articles in NPR and USA Today highlight the problem with our relationship with our tax returns specifically.
Does it Even Make Financial Sense to Get a Tax Return?
I’ve always thought of a tax return as a good thing. I mean, you pretty much get a return or owe money, right? Breaking even seems like a delicate balance and I simply don’t want to make that gamble. With the recent uptick in news on tax returns, I’m learning that I may be thinking about it all wrong.
A recent article in USA Today addresses this topic and goes so far as to say that getting a tax return might not be a good thing at all. In fact, it could even be costing you money from month to month. This is especially true for those living paycheck to paycheck:
“‘Often the very people who celebrate receiving a refund are those who are most in need of extra money in their pocket each month,’ said Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling.
… Cunningham points out that a refund of $3,000 adds up to about $250 in extra taxes each month – cash that may make the difference between missing a car payment or bouncing a rent check for many lower-income Americans.”
I don’t know about you, but I could certainly do well to have a couple extra hundred dollars in my pocket each month. In fact, doing so would allow me to double my student loan payment every month – an act that would save me thousands of dollars in interest and probably knock a few years off my 20 year repayment plan.
The reasons I – and many people – don’t do this vary. However, two major factors are not understanding how/why to plan to not get a return and preferring to have a bigger chunk of money at the end of the year. As USA Today points out, many people think this will allow them to save better than they would on their own – but this only works if people actually put the return into savings when they get it, which leads me to the next point…
Who’s Vying to Get a Piece of Your Tax Return Pie
We’re not the only ones excited about tax return time. Retailers looking to increase sales in an otherwise slow time of year capitalize on the fact that many Americans are about to receive a large check in the coming weeks. How? Sales.
A recent article on NPR discusses the fact that retailers are planning ahead to find ways to lure you into their stores so you can spend your tax return on their goods rather than whatever it was you originally had planned for this money. If you even type “tax time deals” in Google, you’ll find pages of results showing stores that advertise special prices just for this month only. Of course, if you ignore any advertisements you see, then this won’t be an issue. If only it were that simple.
What We Really Do With Our Tax Returns
If we’re deciding to get a tax return each year (instead of changing our taxes to take out less each month) so we can force ourselves to save more, why does the impulse to spend some or all of that money hit so quickly when the check comes?
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I find myself guilty of this every year. I find out the return I’ll get and then start fantasizing about using it to pay down my student loans more or pad my savings account. But inevitably I find something to spend my money on as well. Maybe it’s something I’ve had my eye on for the past few months or it’s simply an impulse when I’m out and about. It’s so easy for me to rationalize because it’s usually a small fraction of the total amount I’m getting back. There’s just something about receiving that larger lump sum that makes me feel like it’s okay to have a little fun with it too – something I probably wouldn’t do if I received smaller amounts each month.
But where’s the logic in that? If I’m taking a return each year in the hopes of paying down debt or saving more money, then why do I receive the money and feel like I deserve a little something special before I apply it to its allotted function? Yes, it’s good to have fun with money and not just approach it like a chore – but that fun should be planned. I don’t work so hard for my money to just spend it without planning ahead. Impulse spending often leads to regret for me – while planned fun spending is more rewarding.
So why do so many of us go a little retail crazy with our tax returns? I’ve heard people use tax returns for little things like I do all the way to something as big as a vacation. The question is, would we treat that money the same way if we received it in smaller chunks each month? Or would it be easier to budget that money to longer-term benefits like debt payoff and savings and retirement building?
There’s no clear answer to these questions. In fact, the answer should be different depending on your particular situation. But what is clear is a need to rethink our gut reaction to getting a tax return and how we spend it. No matter what we choose to spend it on (or not), taking a few minutes to make sure the decision makes sense for the whole year ahead (and not just these few weeks) can snap us out of the return retail spending mindset.
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