There are two typical responses when a person finishes preparing his tax return, depending on the result. If he owes money, I hear, “Do’h! I have to pay the government more. I wish they’d use my money more efficiently.” If he is due a refund, I hear, “Woohoo! I’m going to get a big fat check from the government!”
I like to receive checks in the mail just like anyone else. But the check from the goverment I’ll receive for a tax refund is my own money. I let the government use it over the course of the past year. Now they’re repaying the money I lent with no interest. That doesn’t sound like a good deal when that money could have been invested. It’s not a good deal for the economy either, as they money could have been dumped into the market if I chose to purchase more cable modems.
Meanwhile, companies want you to receive the lump sum check from the government, and they have created contests and “deals” designed to get you to use that newfound money with them. H&R Block is urging you to double your refund just by filing your taxes with the company. Note that if you file your taxes but are due a refund from the IRS, according to their frequently asked questions, you receive the minimum winning of $1,000.
For those expecting a refund of larger than $900, Jackson Hewitt offers a MoneyNow Loan. They’ve advertised this on television every year for the past few years. Here’s a commercial that sticks out in my head: The tax advisor is sitting at his desk, talking on the phone to a customer. He mentions to the caller that he can file his taxes and have his refund today. The camera zooms out and the caller has materialized in the studio where they’re recording the commercial. It’s a very fourth-wall type of experience.
In any case, these loans are not good deals. The fees are generally outrageous. I’d like to give you the details, but Jackson Hewitt’s schedule of fees is only available if you open an account with them. About.com has the skinny on these types of loans, which exist to take advantage of lower- and lower-middle-class workers who live paycheck to paycheck.
Can we conclude that it’s better to owe the government on tax day than to receive a refund check? Well, not always. The individual who is reponsible with money would be better off owing the government at the end of the year. This person will invest the difference after each pay period in an appropriate fund so the money will grow over the short term. At the end of the year, there is money left over after writing that check.
The irresponsible person may spend this money for frivolous things or invest poorly, losing money over the short term. Perhaps that will result in the lack of cash to pay the tax bill at the end of the year. The tax goes onto the credit card, and he ends up paying interest on that balance. This guy would have done better by letting the goverment hold onto the funds, even at 0% interest.
(Mighty Bargain Hunter has a warning: don’t owe the government too much at the end of the year; you could end up owing a penalty fee for underpayment of estimated taxes. Here’s how to calculate the penalty [PDF]. Good luck.)
If you file your taxes with help from a company like H&R Block or Jackson Hewitt and you end up owing money, they make it easy to pay your taxes with your credit card. Someone is always anxious to make money off of people.
Updated July 16, 2010 and originally published February 21, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.