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Money

Tax Refunds - If You Receive A Tax Refund, The Government Just Made Money Off You!

By Travis

Tax refunds! Are they good or bad?

Who doesn't love a tax refund! I mean, are you going to pass up getting a check from the government. Almost everyone who receives a tax refund ends up bragging about the refund to friends!

Anytime the government wants to pay me, I will take the money. BUT, what if I told you receiving a tax refund is a bad thing? Would you believe me?

Why Tax Refunds Are Bad

Think about what it means to receive a tax refund. If you receive a refund from the government, it means you paid them too much throughout the course of the year. Let that sink in for a minute and let me state this a different way.

If you received a refund from the government, this means you paid the government money that was yours. The government had your money for some extended period of time that was yours.

What That Money Could Have Been Doing For You

What does that mean for you? This means that you could have used that money to invest instead of the government having it. Let's say that you received a tax refund for $1,000 last year. If you were to take this money and invest it in something earning 7%, that $1,000 would be $1,070.

Does that change your perspective a little bit on getting a tax refund? Hopefully it helps you think of receiving a tax refund in a different manner.

What Should the Goal Be For Taxes

Ok, now that I have tried to change your mind on tax refunds, let me define what the goal should be. The goal for anyone should be to owe or receive as close to $0 as possible. I am not a tax professional and I am not comfortable giving specific advice on how to do this, but that's the goal. There should be plenty of tax professionals who can help you understand how to try and do this.

The more complex your return gets, the more difficult this usually becomes. If you are a simple W2 earner, the calculation on how much you owe to the government in taxes should be straightforward. Doing a quick google search, you can use a site like this to determine how much you owe: https://smartasset.com/taxes/income-taxes

Where Most Go Wrong With Tax Refunds

Here is the most common problem with people receiving "unexpected" money. Typically, you will go out and immediately spend it! How do I know this? I work in the eCommerce industry and we see a spike in sales around tax refund time.

If you haven't put a focus this year on optimizing your taxes, don't spend the money on stuff! Use any refund as a start or continuation of your investing! Don't make the most common mistake most do.

Key Takeaways

  • Receiving a tax refund from the government is not good! This means the government was holding onto your money!
  • Try to calculate how much money you should owe in taxes using the link above. Talk to a CPA for more specific help. Work to get the amount withheld from your checks to equal that amount.
  • If you do get a refund, don't fall into the trap of immediately spending it on things you don't need!
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