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April 11, 2008

Should you want a tax refund?

It's tax payment time again for the federal income tax. Most people are hoping for a big refund from Uncle Sam. But from the point of view of personal economics, is a refund really a good idea? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"We do this program every year, because, I think, people still have the wrong idea about a refund, again from an economic point of view. The answer to that question is, 'No, you should not want to get a big refund from the federal government.' The reason is that means you have given the federal government an interest-free loan for that entire year. In other words, you have said to the federal government, 'Here, take my money, use it for whatever you want to use it for for a year. I'll get it back, but you're not going to pay me any interest on that.' How many of you, how many people would want to do that in their day-to-day lives, just give an interest-free loan? So what you really want to do is adjust your withholding - work with your employer or if you are self-employed, figure this out on your own - adjust your withholding so you can get your refund as close to zero as possible. Now some people will say, 'But I use my refund as a way of forcing myself to save.' Well, if that's your goal, there are much better ways to do that. You can have an automatic withdrawal from your paycheck, so you don't even see that money, and that goes into an interest-earning account. The point is, you want to earn interest on money that you saved, and you're not doing it when you get a refund."

Posted by Dave at April 11, 2008 08:58 AM