Your Tax Refund is Not a Reward

Tax Refunds Aren't Rewards

This past weekend I was driving my three boys to a family birthday party. We were listening to Pandora in the car-specifically the Final Fantasy music channel (why yes, we’re a family of video game geeks. Don’t judge). Since I’m too cheap to spring for the ad-free version of Pandora, we were also treated to some lovely advertising. We were about halfway through our trip when this lovely gem of an ad came on:

You’ve worked hard all year and you’ve earned your tax refund! Treat yourself for all your hard work – come on down to Hairy No More for laser hair removal today! 

Now, I couldn’t let that one pass on by without a rant. Since my kids are still young (13, 9, and 1) they have yet to earn a paycheck where they get the joy of seeing part of it evaporate to various taxes. We rarely get a tax refund – last year I owed $17 and it was the happiest tax year ever! – and when we do it goes toward our financial goals of the year. So the boys don’t see us getting or spending a tax refund, and I figured they may not be aware of what many others do with theirs.

Your Tax Refund is Not a Reward

And so began my opportunity for what I’m sure was an extremely interesting educational experience on tax refunds.

Your Tax Refund Is Not A Reward For Your Hard Work

“Wow! Did you guys hear that advertisement! I can’t believe it!”

“What?” asked my 13 year old, who had been using the long car ride as an opportunity to get some time on his 3DS.

“There was just an advertisement on Pandora saying that your tax refund is a reward for your hard work all year! And you should use it to treat yourself to laser hair removal! That’s so rediculous. Do you guys know what a tax refund is?”

“No,” said the 13 and 9 year olds. My one year old was sleeping in the car, but even if he’d been awake, he wouldn’t understand what I was saying.

“When you go to work, part of what you make is kept by the government in taxes. If they keep too much of your money, then they give it back to you. When they give it back to you, that’s called a tax refund. But it’s not a special thing or a reward-it just means they kept too much of your own money from you! Instead of getting a tax refund, you could have been keeping that money all year long to use for the things that are important to you.”

“That sounds dumb,” said my 13 year old.

“It is dumb. You shouldn’t be happy if you get a tax refund-you should be changing it so the government doesn’t keep as much money in taxes in the first place.” I said.

“Are we almost there?” asked my nine year old, clearly fascinated by the conversation.

I figured this should be the end of my rant. When it comes to teaching my kids about money, I try to use opportunities like this as “teachable moments”. Whenever we’re in the store, see something on TV, or have a conversation about college, I use a few minutes to try and teach a quick money lesson. I assume that some of them will stick with them, and some won’t. Since this was a brief conversation, I thought they may not even remember it later in the afternoon-let alone when they’re adults. But I don’t want to let opportunities like this pass on by without using them as a quick money lesson.

I see and hear this same kind of attitude around tax refunds all the time in the media. A few weeks ago, I heard a car commercial that was offering to match your tax refund (up to a certain amount) for a down payment on a car. If we had regular TV – we cut cable many years ago – I’m sure I would be seeing much more advertising that would be fodder for educational opportunities aka rants.

What Are People Doing With Their Tax Refund?

According to a survey by Bankrate, it looks like most people are planning to use their tax refund wisely. Or at least, they tell surveyors they are. According to that article, 84 percent of Americans receiving refunds intend to pay down debt, save or invest their windfall or use it for necessities. I was interested to learn what people are really doing with their tax refunds, versus what they planned to do, but I wasn’t able to find that much on the topic. I did see this from CNBC from a few years ago that confirmed my suspicion that what people plan to do, versus what they actually do, is different.

Why might this be? Well, lets say that you’re participating in a survey about how you’re going to use your tax refund. You know that you should save it, or invest it – maybe use it to pay down some of that car loan or credit card. Since you know that’s what you should be doing, you’re more likely to answer on surveys that way. The same phenomenon happens when you survey people on what they eat, and compare it with what they actually eat. People know they shouldn’t say that they’re planning to have a donut and coffee for breakfast, or Cheetos for a snack. So they don’t mention those things, and instead answer in a more idealized fashion. This concept is called “response bias“, specifically social desirability bias. This is the fact that “…desires of the participant to be a good experimental subject and to provide socially desirable responses may affect the response in some way”

What Should You Do With Your Tax Refund

Sorry to give a lawyer – type answer, but “it depends”. The best thing is to look at your overall financial dreams and determine how this money can help you accelerate them. Don’t have specific goals yet? Pop on over to my article on getting to know your dreams, and keep this money aside until you’re clear on what they are.

Some excellent potential uses of a tax refund include:

  • If you don’t yet have an emergency fund, or it’s lightly funded, you can use this to beef it up. Here’s why you should always have an emergency fund and plan
  • If there’s a debt you’re working to pay off, you can put it toward that
  • If you’ve been meaning to start a college fund for the kids, use my college gifting resource guide to start a 529 plan. Or if you already have one but want to increase it, go ahead and mail that check
  • You could be like me and put it toward a mortgage freedom fund
  • Set it aside in a specific savings account for a planned future expense – car repair fund, home repair fund, car replacement fund, planned vacation
  • Use it to start a “snowball of savings” in your life and optimize your expenses. I’ll write about this more in the future, but essentially this is using small windfalls or savings to exponentially increase the amount you can save each month. Examples include:
    • Buying an Ooma online and using it to ditch your internet phone, saving $45 or more a month
    • Snagging a Roku or Amazon Fire stick so you can cut cable and switch to streaming, saving $100 or more a month
    • Get cell phones from Google Fi, switching from your expensive provider and saving $100 or more a month
    • Pick up a warehouse club membership and use it to get some staples, saving you $50, $100, or more a month

For more great advice on managing windfalls, be sure to check out Bogleheads.

Also, look at adjusting your withholding. Only you can know if you’re going to really have the discipline to save extra money each month vs. managing it well if you get it all at once. Although this is technically an interest free loan to the government, the interest on savings accounts is so low lately that the amount you would have earned is negligible. If you would have the discipline to save it, it’s better to get that money working toward your dreams every month rather than waiting. But if you know you would just absorb that extra into your expenses, go ahead and continue to get the refund. It’s all about what works best for you.

Family Financial Lessons – And I Want to Hear from You!

After having a fun time at the family birthday party, we began the long drive back home. About half an hour into the drive, the same commercial came on Pandora again. This time, my 13 year old piped up and said, “Mom, there’s that dumb commercial again! Can you believe that they’re saying that you worked hard for your tax refund when you’re just getting your own money back?”

So there’s hope that something on that particular lesson will stick with them as they get their first jobs.

If you’re using your tax refund to further your dreams, and you have kids, be sure to talk to them about it. Let them know what a tax refund is, and why you’re putting it toward that specific dream. Talk about why this dream is important to you and your family. Don’t let the laser hair removal and car companies of the world be the ones to teach your kids about the way to spend a refund.

I want to know – are you getting a tax refund? If so, what are you doing with it this year? Let me know in the comments!

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20 thoughts on “Your Tax Refund is Not a Reward”

  1. Ha your 13 year old is pretty sharp!

    I’m afraid I’ll be getting a pretty big tax refund this year due to a couple unexpected write offs. Most significant of which are some losses we incurred in our small business. We took our lumps in 2016 but I think we’re getting that ship straightened out. I’ll get the taxes finished up in a week or so to know for sure. But no matter how much is coming back, it’ll go straight to my taxable brokerage account where all excess cash belongs!

  2. I completely agree with this! Tax returns are just the government saying, “Thanks for the free loan, I will take it again next year. ” hahahaha!

  3. TheRetirementManifesto

    Good for your for finding “teachable moments”, tho tax refunds is a stretch!

    I think of it this way: if I had withheld less and not gotten the tax refund, I would have saved in via monthly ACH. Therefore, it’s savings. Every time. 100% of tax refund goes into Vanguard.

  4. I realize the tax refund is essentially an interest-free loan you gave the government, but it doesn’t particularly bother me.

    In the past, I’ve used it to bulk up savings, start an IRA, max out my IRA, start a taxable brokerage account, and increase my house downpayment. And, psychologically, I’d rather have a little less during the year if it means avoiding a bigger bill in the spring.

    That said, I know I’ll have to make some estimated payments for 2017, so if we get a refund I’ll probably put at least part toward next year’s taxes.

  5. I got a tax return of $130 which means I did pretty well for 2016. Last year, I got a tax return of almost $3k, which was nice, but it went towards debt paydown and investments.

    I don’t get why people think having a big tax return is a good thing…

  6. Smart Provisions

    I agree! I would rather have a tax bill instead of a tax refund! It excites me more when I get a “free interest rate” loan from the government than me giving them a “free interest rate” loan!

  7. I also think it depends on how financially savvy you are and what you do with the money. For instance, if you’re going withhold less but end up spending that money instead of investing, maybe you would have been better off loaning it to the government and getting a refund later. Likewise, if you spend said refund on laser hair removal instead of putting it toward financial goals, then you’ve just screwed yourself over twice.

    On a side note, I’m a huge fan of Final Fantasy (geek alert). I went to one of Distant Worlds concerts in Chicago a few years ago. Love the music from Final Fantasy X!

  8. I am glad that you value that a tax refund if used for savings is similar to saving the money throughout the year. So tired of the guilt in the blogsphere for getting a refund. My husband and I know ourselves and that we will be even more frugal if the max amount is taken in taxes. The refund goes to charitable giving and then to emergency fund or IRA. Similar to how we treat bonuses. We still have money autodeposited to savings during the year as well.

    1. I think it’s all about whatever works for you and your family. As long as you’re using the refund wisely, then it’s going to have the same impact on your life, goals, and dreams as getting the money every month. It sounds to me like you use it to do some great things!

  9. This was our first year in nearly a decade to get a refund of more than $75 (we got almost $800) and the first thing I did was email our payroll department for a new W-4 so that I could “stop loaning the government my money interest-free”. Our Finance Director actually laughed. “It’s just $772” he said. Yep, just $64 a month that could be better used for my own financial goals. The larger-than-expected refund came at a great time though, as it helped us pay off our car. If we didn’t have the car debt, it would have gone into savings.

  10. I cashed in some larger savings bonds this year, and my yoga pay isn’t taxed, so I owe this year (I didn’t expect to teach that much last year! ). I have much smaller savings bonds to turn in this year. Because teaching is variable, it’s hard to offset my regular salary. My plan instead is to set up an llc and a solo 401k to save on taxes.
    Most of my past refunds were in the $200 range. In my career due to the variable nature of the industry I’ve had layoffs, which then means I’m earning less, so I decided trying to tweak things for $200 isn’t worth it.
    Refund money goes into savings which goes towards my Roth. Bonus money, a small portion goes to treating myself, and the rest to savings. I’m interested to see how they do bonuses this year. Last year it sounded like it was a new thing to issue it as a separate paycheck, and it didn’t go into 401k like a normal paycheck. I 100% don’t mind if part of my bonus goes to 401k. 🙂
    I’m glad you had a teachable moment. I hear car, furniture ads about spend your refund, or worse, your estimated refund ‘with us’. *shudder*

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