Is it “Irrational” to be Happy about Getting a Tax Refund?

Will you get an income tax refund this year? If so, you’re in the majority. Depending on which survey you believe, about 60% to 75% of taxpayers will get money back from Uncle Sam this year, and the average refund will top $2,800. If you’re happy about that, Time magazine thinks you’re a little kooky.

In an article entitled, Why We’re So Irrational When It Comes to Tax Refunds, Time cites four ways that refund recipients think illogically.

1 – Seeing Uncle Sam as their rich uncle

On Facebook, Trish, 36, posted a photo of her new juicer along with a caption that read, “Thanks Uncle Sam!” In the course of my research, I spoke with many consumers like Trish, who seem to think that tax refunds pretty much appear out of the blue.

The article’s author points out that people tend to treat gift money differently than money they earn, spending it more freely. Of course, a refund isn’t a gift; it’s a return of hard-earned money that was used to overpay one’s taxes.

2 – Using Uncle Sam as a piggy bank

“I’ve thought about changing my taxes, but I really count on my refund for our vacation,” says Sandra, a 40-something mom of three, who is skeptical of her ability to save. “It always seems like something comes up.”

Even though savings account interest rates barely register a pulse, Time argues that automatically transferring a portion of each paycheck to a savings account “would seem to be more sensible than letting the U.S. government hang onto your money for most of the year.”

3 – Paying interest on your own money

This one is targeted at the 42% of people who plan to pay down debt with their refund.

Someone with a $2,800 balance on their credit card will pay nearly $500 in interest fees by making the minimum payment each month for a year on a card with an 18% interest rate. On the other hand, if that person had less of his paycheck withheld so that he had an extra $235 per month to add to his minimum payment, he would be debt free in 10 months and pay less than $240 in interest.

4 – Letting inertia take over

For most, the idea of rejiggering withholdings is a chore. It’s not just that the paperwork is tedious. There’s also the added anxiety that you’ll do something wrong and wind up owing a huge amount at tax time—or worse, wind up audited.  All of which explains why most people don’t bother.

The IRS has a fairly user-friendly withholding calculator you can use to estimate how much you should really have withheld from your paychecks. If you’re having too much taken out, contact the HR department where you work and ask about making a change.

What’s your approach to income tax refunds? Do you like getting money back or have you taken steps to make sure no more than necessary is taken out of your paychecks?

Matt Bell is Associate Editor at Sound Mind Investing. Since its founding by Austin Pryor over 22 years ago, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice.

Image courtesy: Thinkstockphotos.com

Publication date: April 8, 2013