“If you get a tax refund, you’re an idiot. You’re giving an interest-free loan to the government. Adjust your withholding so you get the use of all your money all year long.” This bit of financial advice has been around since Charlemagne ruled Europe, and for all we know, may have originated with him.1
With all due respect to the King of the Franks, Lombards and the Holy Roman Empire, if you find it easy and convenient to save by overpaying your taxes a bit, then go right ahead.
The average taxpayer received a refund of $2,763 in tax year 2017, according to the Internal Revenue Service. The average refund works out to an overpayment of $53.13 a week. If you make the median (half higher, half lower), family income of $61,372, your tax refund is equal to about 4.5% of your income.
One of Charlemagne’s arguments against getting a tax refund was that if you invested that money instead of letting it waste away in Uncle Sam’s vaults, you’d be better off. And that was good advice in his day, when you could earn at least a few chickens or pigs on your hard-earned deniers, the coin of the realm in Charlemagne’s day2. Given current savings rates, however, you won’t be much better off. The average bank money market account pays 0.21% annual interest, according to Bankrate.com. At that rate, your total interest for a year would be a lordly $3.19, which would be diminished by inflation and, ironically, taxes.
Furthermore, many people count on their tax refund to pay property taxes, buy new appliances or get their car (or cat) fixed. If getting a tax refund is the only way you can save, then save through a tax refund. You’re not doing yourself terrible harm. For many people a tax refund is simply a convenient method of forced savings.
Naturally, there are several caveats to this advice.
- An extra $235.25 a month is nothing to sneeze at. If that much of an increase could keep you from borrowing – or make life less stressful at the end of the month – then go straight to your withholding form and decrease your withholding. If you get a huge tax refund, of course, you should revisit your withholding as well.
- If you’re having trouble saving, there’s not a bank or mutual fund company in the world that wouldn’t be happy to suck out $200 or more from your account on a monthly basis. And they will do it automatically. Charles Schwab & Co., for example, will let you start an account for $1. Or $235.25. If you don’t use all your savings to buy a new refrigerator, you could start to build up a nice savings account.
- If you have lots of credit card debt, reduce your withholding and pay it off. Paying off an 18% credit card bill is roughly equivalent to earning 18% in a savings account. Even Charlemagne’s father3 couldn’t argue with that.
Finally, there’s the danger that, for one reason or another, you won’t get the refund you’re counting on – or, even worse, you could owe taxes. The average refund through Feb. 8 was $1,949, about 9% smaller than the same period a year earlier. It’s generally a good idea to check out the IRS Withholding Calculator at least once a year to see if your refund will be about where you want it to be.
Not all ancient finance wisdom holds up over time, and everyone’s situation is different. Nevertheless, in the words of Charlemagne’s second wife4, ‘Don’t be embarrassed if you get a tax refund.”
- Or his mother, Bertha Broadfoot
- Three deniers equaled one liard.
- Pepin the Short.
- Hildegard of the Vinzgau.
(As with everything on this blog, opinions are entirely my own).