Tax Refunds….a Good Thing?

 

We all know how excited some people get when they get an income tax refund.  And, we’ve probably all heard accountants, tax preparers and others with good intentions say something like, “you know, that is your money that you let the government use interest free for the past year”.  Then, they proceed to tell the excited refund recipient that they should adjust their withholding so that their refund won’t be so big the next year.

In theory, this is good advice.  I mean, why should you let the government hold your money for you?  Surely it would be put to better use in your own pocket.  True.  But, in practice, it doesn’t seem to work out too well.  Why?  Because, if someone increases their paycheck by $50, guess what?  That is $50 more that they get to spend on clothing, dining out, iPads, etc.  So, at the end of the year, they have nothing to show for it.  On the other hand, if you get a refund of $3,000, for example, that is good money that you can actually do something with, like invest or pay down debt.  So, before you go decreasing your withholding, make sure you have a plan for the extra money from each paycheck.