Another Reason to Avoid Large Tax Refunds

by Kevin on February 22, 2009

I received an interesting comment on my recent article, The Tax Return Spectrum, from The Passive Dad:

Living in California I’ll say that I’m an idiot for receiving a refund this year. I would much rather owe the state as we don’t know when we’ll get our money back. IOU’s are only good when playing Monopoly as a kid, not in real life.

If you haven’t heard, California is in quite the budget crisis and has suspended tax refund payments. So if you were like another commentor, Budgets are Sexy, and expecting $6,000 in taxes back… tough luck.

Now, will California end up paying out those tax refunds? I would say that’s a safe bet.

Would the federal government ever suspend tax refund payments to work on a budget? Considering how large our budget deficit is now I highly doubt it. They would send the checks out regardless.

Either way, I would much rather get my money throughout the year. This is just another reason to set up your W-4 forms such that the correct amount if taken out of every check. Any time you lend someone money — including the government — there is a risk of default. Suspending payments isn’t the same as default, of course, but there are costs that you incur not getting that money on time.

What if you counted on your refund to pay off major credit card debt every year? Or what if you were incredibly ambitious (dumb) and went ahead and spent what you were expecting back from the government?

Fix your tax situation. Try to get the right amount taken out so you end up as close to zero owed/owed to you as possible.

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Jake February 22, 2009 at 9:52 am

Kansas was in the same situation, but we’ve already fixed it…

Do You Dave Ramsey? February 22, 2009 at 9:58 am

Very insightful post. As we work through this tax season we should all examine our refunds and tweak our w-2s accordingly.

Without question CA is doing something unique but I promise other states will follow suite in future years.

But the truth is that YOUR cash in hand is always better than waiting for the governments to give it back.

Thanks for sharing.

Kevin February 22, 2009 at 4:01 pm

@Jake: Yea, I didn’t think California was alone with this problem. At least Kansas fixed it.

@Do You Dave Ramsey?: I can imagine many states having to do it next year if they don’t make drastic changes to their budgets. Cash is king, as always.

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