The only “reward” at the end of the tax filing process for many is the hope of a nice big check back from the IRS in the form of a tax refund. The bigger, the better, right? Not exactly.
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While a tax refund is certainly better than a tax bill, there are some good reasons why you should reconsider hoping for a refund this tax season. Experts explained why your goal when filing your returns should be to keep tax refunds as small as possible, and why that’s not as bad as it sounds.
When it comes time to file, if you look forward to a big tax refund each year, you’re not alone, according to Steven Sarrel, CPA and partner with Raines & Fischer, LLP. “Society has ingrained the idea of a tax refund as a celebratory moment, framing it as a financial windfall,” he said.
Consumers in the United States are also bombarded with ads asking what you’ll do with your refund and corporations not-so-subtly pushing you to view a refund as a chance to splurge. However, your federal tax return, if you do get one, would better serve you by putting it away in an emergency savings account or toward your retirement plans.
However, there’s a problem with this mindset of paying your taxes to then just pay for things, Sarrel said. “This social construct reinforces the idea that a tax refund is a bonus or reward, rather than what it truly is: Your own money being returned to you because you overpaid in taxes throughout the year, allowing the government to hold onto your money interest-free all year.”
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It’s easy to fall into what Sarrel calls this “scarcity mindset,” which leads people to prioritize the immediate gratification of receiving a lump sum over the long-term benefits of managing their income more effectively. Your income in tax returns, and how you’ve filed your taxes in general, can either lead to a surplus or deficit calendar year.
“While the refund feels like a moment of financial relief, it’s often just masking deeper issues in how money is managed,” he said.
You can look at it as a forced savings mechanism, but instead of you reaping the benefit in an account of your choosing, the government acts as the savings account, and it comes with no interest or financial growth. Simply put, don’t be your own tax liability when filling out a form W-2, deciding on tax exemptions or racing against the tax extension deadline.
