Episode #27: Large or Small Tax Return: Which is Better?

large or small tax return

April 28th, 2020

Tax return season is upon us and with it comes many unwanted opinions. Some experts say that it’s better to aim for a small or break even tax return so you keep the extra income throughout the year. Others understand that people prefer a large return that feels like a yearly “bonus”. So which is better? Is there a right or wrong answer? Listen to this episode of Making Finance Fun for my hot take. 

Outline of This Episode

  • [0:11] Hot take: large or small tax return?
  • [1:27] The Big Scary Disclosure
  • [2:05] Why I think it’s OK to get a big tax return
  • [5:30] Americans are conditioned to expect a tax return
  • [6:53] You could set yourself up at break-even
  • [8:39] There are valid points on both sides
  • [11:28] The whole point of the show

Plain and Simple: Most Americans Can’t Budget

Americans—across the board—aren’t the most disciplined of budgeters. If you’re the rare breed that has an excel spreadsheet of your budget, kudos to you! The majority of us don’t budget well. It’s like a diet—simple in theory, but difficult to carry out. If you’d normally get a $5,000 tax return, it would be approximately $416 extra in your pocket monthly. 

You could save $416. Perhaps you’d be practical and invest it in stock or your 401k. Maybe you’ll pay off school debt or a car loan. But would most people do anything significant with that extra cash? probably not. Most people just blow it—I’m guilty of it too. We’d all probably have a lot more in savings than the national average if we were more disciplined. 

Let’s be honest—a tax return feels like a yearly bonus

Americans have become conditioned to expect a lump-sum tax return. It feels like a bonus, even though it’s money that YOU overpaid throughout the year. You know, just an interest-free loan to the government. In the end, it’s still your money. The plus side is the government ‘saved’ it for you throughout the year and then plopped it back into your lap.

Think about advertising around this time of year—it’s all geared towards spending your tax return. Need new furniture? Ready for a vacation? Perhaps you need a down-payment on a car? People aren’t good budgeters, so the reigning theory is that perhaps they’ll make smarter choices with a lump sum. 

What to do to keep more money in your pockets throughout the year

If you’re one of the expert-budgeters and prefer to keep and use the extra income throughout the month, there are ways you can do that. But it’s difficult to find that break-even point where you don’t owe money but don’t get a return. You could adjust your withholding and file a W-4 and submit it to your employer. Most people attempt to come within a couple of hundred dollars, either owing it or receiving a small tax return. 

The long and short of the debate

I don’t mind getting a large tax return. I’ll use the extra cash to knock my mortgage down, increase my savings, make an extra car payment, etc. I don’t know what everyone else does with it, but I can say this: there are valid points on both sides of the argument. 

Don’t let anyone ridicule you for the choice you make. Don’t let people tell you you’re dumb—everyone is different. Can’t budget? Take the lump sum. Amazing with money? Spread your money out over 12 months. Either way, it’s cool. The bottom line? Just be smart with your money.

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