Home » Financial Literacy Month » Financial Literacy Month 2015: Be Financially Smart About Income Tax Refunds

Financial Literacy Month 2015: Be Financially Smart About Income Tax Refunds

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DONED2014 SmallAbout Donell Edwards: Donell Edwards is President of CWR Media and is also founder and publisher of The College World Reporter (CWR) magazine and CWR World News & Information Service.  He is also a professional speaker, freelance writer, and entrepreneur.


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We’re Celebrating Financial Literacy Month

Know Your Money
Friday – April 17, 2015

Financial Literacy Month 2015
Be Financially Smart About Income Tax Refunds
By Donell Edwards

The purpose of the Know Your Money Blog is to educate and inform readers so that they become better at managing money and making money-wise decisions, and to help eradicate generational poverty for those who find themselves trapped in this vicious cycle.  This includes helping readers with the step-by-step process of identifying destructive spending habits, carefully and regularly monitoring spending, developing and rigidly living by a realistic budget, learning to make wise spending choices, working to transform long standing negative behavioral patterns, acknowledging the need for assistance with personal money management, accepting accountability for acquiring knowledge and information to improve money management skills, and providing readers with encouragement and support to make the commitment to change and to find the willpower to resist the temptation to allow spending to spiral out of control.  Ultimately our goal is to help each individual who reads Know Your Money to become more financially literate and to achieve personal wealth free from debt.

So, today’s post about adjusting tax withholdings is very relevant to our mission to help readers improve their personal money management by adding money to the personal or family budget by correcting the W-4.  It is important to understand that this is a personal decision, and some may at this point in life be in a position where they really feel that they need the large tax refund more than the increase in monthly income, that is a personal choice.  However, the purpose of today’s post on tax refunds is to educate and inform readers so that an informed decision can be made in regard to whether to correct the W-4 or not, and if now is not a good time, to make it a goal that at some point in the near future the income tax refund you receive for that year will be the last tax refund you will ever receive.

We also want to caution readers not to make changes to your W-4 yourself, regardless of how qualified you may feel, especially in completing the Adjustments and Deductions Worksheet on page 2 of the W-4 form.  If you work with an experienced and reputable tax professional you should avoid any mistakes that result in having to pay taxes when you file, or at the very least, owing only a small amount.


Stressed Over Money


In today’s post we examine two articles listed in yesterday’s blog from two writers who think it is a good thing to get an income tax refund, and we will explain why we disagree with them.  The writers and their articles are representative of the thinking of many others who support getting a tax refund.

One of the articles is “5 Reasons Why A Big Tax Refund Can Be A Good Idea” from USA Today, written by Dave Carpenter.   The other article is “Everything You Know About Getting A Tax Refund Is Wrong” from Daily Finance, written by Rich Smith.  Both articles support the idea of getting a tax refund and cite their reasons.  Listed below are the reasons cited by each writer:


Dave Carpenter – Associated Press

  • Avoids debt trap of owing the government taxes
  • Provides a welcome windfall
  • Protects against tax surprises from unexpected events in life that affect tax liability
  • Forces Savings and prevents squandering money
  • Costs little in lost opportunities because of the low interest rates for CDs and money-market savings accounts

Rich Smith – Motley Fool

  • Low interest on savings accounts
  • Miscalculating withholdings resulting in owing taxes with penalties
  • MoneyRates.com study shows 69% of people (who were polled) use their refund wisely and save at least half


In my response to both articles it must be acknowledged that not everyone is in the same financial situation and so obviously the options are going to be different depending on an individual’s circumstances.  For this post we will consider that everyone is in one of three categories:

Living from paycheck-to-paycheck and financially distressed with no money left over at the end of the month, and probably not enough money to pay bills and expenses. We will call this Group 1.

In fair to good financial condition with money left over after paying bills and monthly expenses.  We will call this Group 2.

Finally, those in excellent financial condition with money to invest.  We will call this Group 3.

The position taken by both Mr. Carpenter and Mr. Smith are very similar.  They both cite low interest rates on savings and miscalculating withholdings resulting in owing taxes at tax times as major reasons that having too much withheld is a good idea.  First of all, both of these gentlemen and everyone who agrees with them assume that everyone who gets a tax refund only has the option of putting the money into a savings account if they don’t spend it, or at least that is the inference.  If that was the case I would agree with them.

But as previously mentioned, the options for those in Group 1, 2 and 3 are not the same.  Those in Group 1 most likely need all of their return to pay bills, make purchases that have been delayed, and do other things that are important to them that they would otherwise not be able to afford.  They most likely are not going to save.  This is the group that we hope will make enough progress by next year that they will have some of the same options as those in Group 2 and Group 3.

Although those in Group 2 and Group 3 could put their money into a savings account, most likely they are more money savvy than that, or at least they should be.  The purpose of this blog is to ensure that everyone that follows over time will have the knowledge to make wiser decisions.  Obviously putting money into a savings account with almost no interest, that may have a monthly service charge, and that penalizes depositors if their monthly average balance falls below a certain amount is not wise money management.

According to the IRS the average tax refund is approximately $3,000.  For those in Group 2 and Group 3 who do not already invest or have a financial planner, they have the option of purchasing stocks and earning a much greater return on their money than with a savings account.  There are fees involved, but in the long run investing is a far better option for those with enough money to invest.  This is another component of our blog that will be discussed after the proper groundwork is laid.  If you do go this route and you have never invested before, be sure to do your homework and carefully select a financial planner to work with.

In my opinion, saving should not be an option for anyone in either group because of the small return in today’s market.

The other reason Mr. Carpenter and Mr. Smith cited for supporting tax refunds was the risk of owing money at tax time.  Although working with an experienced tax professional does not guarantee that no taxes will be due if the W-4 is adjusted, the risk is very, very low if accurate and complete information is provided.  There are risks with anything in life, the smart people anticipate risks and take action to ensure any affect on them is minimum.  Working with an experienced and reputable tax professional in adjusting your W-4 is the smart thing to do and should provide you with sufficient protection from any risks.

Going back to Group 1, even if there is not any money to work with to invest, paying down debt is a money wise option.  Another option is to begin building your emergency fund, which we will also discuss in much greater detail in coming months.

Two other reasons Mr. Carpenter provides for supporting a tax refund are (1.) Providing a windfall and (2.) Forces saving that prevents squandering money.  Although Mr. Smith cites a MoneyRates.com survey in which 69% of those participating reported they used their returns wisely and saved at least half of the money.  Obviously this was a random sample and did not include all taxpayers receiving tax returns.

The average taxpayer does not use this so called “windfall” wisely, but instead spends wildly and without restraint, and in a few days or weeks it is all gone.  Mr. Carpenter’s opinion that by having too much money withheld for taxes forces a person to save and receive a large sum at tax time, rather than squander the extra money that would be received in the paycheck each payday.  The problem with this theory is that if the person is the type to squander the money away each payday, getting a large tax refund only gives them more money to squander away.

This blog, as we have repeatedly mentioned, is designed to help people overcome thinking and habits that result in squandering money away. Certainly that is a problem for anyone not really serious about improving their money management skills.  But for those who want and accept the information provided by the contributors to this blog, and who take the extra step of reading articles from our “Suggested Reading” at the end of most of our posts and who do additional research on their own to educate themselves, they are developing the willpower and transformed money management philosophy to resist the temptation to squander away money.

In conclusion, adjusting the W-4 so that only what a person owes is withheld from their payroll check is a personal decision.  But there is overwhelming evidence that having only what is owed withheld is the money wise thing to do.  If you need more convincing watch the video below, “Don’t Get A Tax Refund”, featuring nationally acclaimed financial expert Suze Orman, who agrees that getting a tax refund is not the financially smart thing to do.



Here is today’s step to financial wellness from Thirty Steps to Financial Wellness developed by Money Management International:

Step 15 – Secure Your Financial Future



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2015 National Savings Forum

Financial Literacy Month Articles from Huffington Post 

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Disclaimer:  I have a Bachelor of Business Administration degree but I am not a financial adviser. However, I have acquired years of knowledge about personal money management through my life experience working through my own personal finances that allows me to share that knowledge with readers of Know Your Money. The Know Your Money Blog posts written by me are my own common sense observations and opinions and are for informational use only. Although my blog includes contributions from experienced financial professionals, please make your own financial decisions based on personal research or contact a financial adviser.


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