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What Does Receiving a Tax Refund Mean For Me?

If you receive a tax refund when filing your tax return, it means your tax liability is less than what you paid the government in taxes.  In other words, throughout the year you paid the government more than you were required and you are being refunded the excess.  On the surface, it may be nice to get a refund check from the government, but in doing so you are giving up the opportunity to earn a return on your refund.  In essence, you are loaning your money to the government without charging any interest.

It has been argued that people are better off having money withheld throughout the year by the government because it has been shown that people are more prudent with their money when receiving a refund check compared to receiving the same earnings in smaller denominations throughout the year by not having as much withheld.  Although this theory may make sense for some, unless you plan on frivolously spending this money there is no logic to this theory.  Instead, there are actions you can take with this money that can provide you with a financial benefit:  a) you can invest that money and earn a return; b) you can pay down debt; or c) you can create an emergency fund which may help you stay out of debt.  If your tax refund is small, it doesn’t make a lot of sense to change what you are currently doing; however, if you have a large tax refund it might make sense to adjust your withholdings.

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