A tax refund is a form of income that you receive from the government for overpaying your taxes. You can receive tax refunds from either your state government or the federal government.
Most people are very happy about receiving tax refunds because it puts more money in their bank account. And this excitement is only natural, since we can all use some extra cash these days.
But getting a tax refund isn’t necessarily a good thing. There are disadvantages to getting one.
We don’t mean to rain on anyone’s parade here. Enjoy the money you get from your tax refund! But, for those who want to find out more about the downside of getting money back in the form of a tax refund, ready on to find out what they are.
What Is The Downside Of Receiving Tax Refunds?
Well, there are a handful of disadvantages of tax refunds. Here’s an overview of the common ones here.
You Are Just Getting Back What You Overpaid For
When you think about it, tax refunds are money you get back for overpaying your taxes. If you pay the correct amount of money to the government over the course of the year, then you would not get a tax refund.
So basically, you are just getting back money that is yours.
You Just Lent The Government An Interest-free Loan
To add to that, overpaying your taxes is pretty much lending the government money. Then they will repay you in the form of a tax refund, but without interest whatsoever.
But it only seems like that if you try to think of it that way. And who knows, maybe there will be a time when you will need extra money, and you will be glad that you overpaid your taxes previously, as you are getting a tax refund to help you cope with your needs. Tax refunds may be helpful if you are considering the timing.
You Feel Like Going On A Spending Spree
This 2nd disadvantage is not really a disadvantage of tax refunds, but rather how it impacts the behavior of those who receive them. If you have paid your needed expenses using money from other sources of income, such as your salary, then receiving extra money in the form of tax refunds can feel like money for a spending splurge.
Having that extra money is a luxury that allows you to buy the things you want, probably because you want to reward yourself for your hard work. But getting that extra money also gives you the opportunity to either put it in your savings, pay down debt or invest it to grow.
Saving or investing that extra cash can turn your life around when you need it. Once instance, saving your refund would come in handy in the case that you got sick and had to pay a large medical bill. Having that extra money secured can help you be prepared for an unexpected emergency.
But whether you will spend your tax refund to reward yourself or to save or invest, it is up to you.
Now you have an answer to the question, “What is the downside of receiving tax refunds?” Overall, it is important to remember that tax refunds stem from overpaying your taxes and budget accordingly.