In the Personal Financial niche, you can expect the sanctimonious chants of “but you gave the IRS an interest free loan!” to start posthaste if you admit you got a tax return. We, however, think that this “tax refund bad” meme is pretty silly… especially in an era of historically low interest rates.
Is Getting a Tax Refund Bad?
Our personal views have evolved on a few things – we tend to agree with our colleague Cameron that emergency funds are more a luxury good than something which Demands Priority over your high-APR credit card and loan shark debt.
So too went our opinion on tax refunds. Now, this probably puts us in the doghouse with Cameron, who makes optimizing cash flows an art form, but in a world where .5% APR savings accounts are the norm (which is what – .3% after your marginal tax rate takes a cut?), I’m no longer that concerned. Look – if you are happy getting .3% on a savings account, your 0% savings in tax return form isn’t hurting you that badly. Is a tax refund bad when you give up $1.50 in interest over a year? Haha, no.
How about if you invested it?
Well, sure, back in 2013 you would have seen a 32.39% gain (followed by a few months of not-so-much this year). But that ignores the fact that your average paycheck was in June – and your June to March 2014 return would have been closer to 15%. You can do the math yourself, but even calculating a buy on every over-withheld paycheck overestimates the typical expected loss. Remember: the S&P 500 won’t return you 30% a year – divide that by 3 and you’re getting closer.
Even a rough gain of 5% from all of your paychecks combined (remember: the weighted average paycheck dollar would come somewhere around June) is still a lot less of a penalty than those suggesting you save an emergency fund before paying off your 19.9% APR credit card would have you incur.
How About the PK Household?
Maybe I’m just a bit defensive – I try to minimize the amount I overpay, but contracting work (and, yes, the roughly minimum wage I make when I work on this site) and a day job left us with a $1,369 Federal Tax Refund. While it would have been nice to have optimized our withholding down to the penny to owe a slight amount (in reverse it’s like you’re taking an interest free loan!), we’ll survive this oh-most-mortal of Personal Finance sins.
This story has a happy ending, this year. Doing our taxes presented us with a personal finance indulgence in the form of TurboTax’s partnership with Amazon this year. In short, we were able to cash out $1,100 of said return in the form of a $1,210 Amazon gift card – as good as cash, in our mind. The remaining $269, of course, came in the form of a regular, boring old ACH transfer to our bank account.
But hey, not a bad ROI for not trying very hard to perfectly hit our tax obligation, am I right?
So, how big of a sin did we commit – and is the 10% bonus a sufficient bailout of your lazy friend PK? How did you do this year? Is a tax refund bad?