No big refund this year?

It’s tax season which means we must endure another round of blaming Americans because they like refund checks.

The theme is embedded in the Washington Post’s story about people reacting to getting smaller refunds this year. Under the tax reform law, the refund was actually sprinkled through a year’s paychecks, leaving not quite as much to be returned.

“Getting a tax refund means that you gave the government an interest-free loan because you overpaid your taxes,” said Nicole Kaeding, director of federal projects at the Tax Foundation.

“It’s a mystery why taxpayers seem to be comfortable — and even happy — with getting refund checks,” said Joseph Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute.

It’s one of the few areas of agreement between conservatives and liberals apparently.

But it shouldn’t be a mystery why people love refund checks. It’s money they haven’t spent, unlike the increase they got in their paychecks. And, sure, it was an interest free loan. But that’s also pretty much what you’re giving to your back when you give it to your financial institution so it can make money while paying you almost nothing in interest.

The average tax refund check in Minnesota is about $2,450, according to Business Insider.

Do the math with this calculator. Assuming a .10 percent interest rate in a savings account — as featured by one of the most prominent credit unions in the Twin Cities at the moment — you’d have $1.50 at the end of the year if you’d adjusted your tax withholding to prevent the “no interest loan” to the federal government.

Of course, you could also have invested that money, in which case this year you’d have about 5 percent less, given the negative return overall in the stock market.

So it really shouldn’t be that hard to understand why people like having a big check instead of an extra $1.50 burning a hole in their pocket. But soldier on with the admonitions, we must.

The IRS says the average refund so far this year is about 8 percent lower than a year ago.

  • jon

    My refund is bigger this year than last…

    Granted both were far larger than usual.
    2017 was the electric car tax credit ($7,500)
    2018 was the solar tax credit (30% of the system)

    Both pushed me from paying in to getting a refund.

    • 2018 was the solar tax credit (30% of the system)

      What did you do to get this? Solar shingles? Solar panels? Solar farm?

      • jon

        Panels, on the roof, 7.2kw’s worth. Grid tied no batteries, 8-9 year pay back period, less if the neighbor follows through on his plan to cut down the big tree in his yard.

        Also 2019 is the last year for the full 30%, after this it decreases each year… and the electric car rebates are based on the manufacture, but Tesla and GM have both run out and the credit is decreasing for them.

  • Mike Worcester

    There are a decent number of people who plan for a refund by adjusting how much they have taken out of their pay every two weeks. They do that so they can plan for what is essentially a bonus cheque in the spring, when funds tend to get tighter for people (for a variety of reasons).

    When the withholding rates changed last summer, I for one had that extra amount taken out adjusted upwards to prevent exactly what is happening to so many others.

    Yes, a refund means you had too much taken out. And yes some people meant for that to happen.

  • Kassie

    There are two things that can happen when you do your taxes, pay in or refund. For me, a refund means I’m not screwed. A big refund means, not only am I not screwed, I get to take a vacation too. I think last year I got about $1000 back in federal taxes and had to pay in $10 in State. I have a very bad feeling that this year I’m going to owe for both.

    • jon

      Before I spent the last two years exploiting tax credits, we frequently would get money back from the feds, and give most of it to the state.

      It worked out well if you filed your federal returns early and waited to file the state returns until after you got your rebate.

      • It worked out well if you filed your federal returns early and waited to file the state returns until after you got your rebate.

        I’ve done that a few years as well…

  • Justine Parenteau Wettschreck

    My husband and I haven’t gotten a refund since the youngest kid turned 18. It’s always about saving to pay more in. Even as a military family with three kids years ago, we never received thousands of dollars. Everything seems to be more extreme now.

  • Jeff

    It seems like our tax situation varies quite a bit from year to year so unless I plug this years numbers into last year’s tax form (and who wants to do their taxes twice) I have no way of knowing for sure. I enjoy blaming the Republicans for everything, but hard to say in this case. I do know the extra $20 or so in my paycheck covered my bourbon expenses.

    • Glsai

      Jeff, do you do your taxes online? If so they usually allow you to download/print a PDF of your tax documents that get sent to the IRS. If you look at those you can look at the numbers there to compare this year and last and see what your tax burden was. I was able to do that and compare mine, and while I paid less this year while making more, some of that change is due to money paid on education as well as paying off student loans.

      • Jeff

        Thanks, I use Turbotax desktop for years so I have a history. I will look into the tax burden next time.

  • Wayne

    Our federal taxes went up this year.

    We’re a middle class family of 5 living in St Paul, and it seems to be the loss of some itemizations along with the inability to deduct local and state taxes above 10k.

    It was expected that higher tax states were more likely going to be negatively affected by the tax law changes than lower tax states. The bitterly ironic thing is that high tax states tend to pay more into the federal system and get less in return in the first place, and now they get to pay even more for their less.

    • Jerry

      I think your last point is a feature, not a bug.

      • jon

        If they could find a way to just tax democrats they’d have done it.

        • They sort of did, with that limited deduction for high tax states.

  • John

    I shoot for break even, but given the choice, I’d rather pay in a little bit extra over the year and get a small refund check than guess low over the year and owe a few thousand to the Fed/State.

    It’s simply easier. And, if I get money back this year, we finally get new carpet in the living room.

    • I shoot for break even

      As do I, but usually have to pay a few hundred into both Fed/State. It was VERY difficult this year due to the withholding table shenanigans that came with that tax scam. i used the IRS’ online withholding/tax estimator and found that without changing my withholding down, I’d end up paying a few thousand come tax time.

      Under the tax reform law, the refund was actually sprinkled through a year’s paychecks, leaving not quite as much to be returned.

      As just mentioned above, i never saw a dime of that “refund in my check” since I had to change my withholding to account for my estimated tax. my paychecks actually went DOWN about $300/month.

      • John

        I have not come out ahead in several years – I’m hoping I’m close this year, but I’m a little nervous to do my taxes now that I’m hearing all these stories. It was a weird year for us, financially speaking, so I don’t know what to expect at all.

        • In addition to my changing my withholding, I socked away $100/month in preparation of a large payment in.

          It turns out I didn’t need that extra $$ i saved and will put it towards a new roof for my house.

          • John

            we had a whole bunch of unanticipated medical expenses this year, along with a loss of second income (related) that have thrown everything into a blender of uncertainty.

            I believe historically, we had my withholding set low, and my wife’s high – which combined with the above, makes me extremely uneasy about tax time. Cross my fingers.

          • Oh man, good luck.

          • jon

            Since you asked about the solar above, and mentioned a new roof here…
            Consider ridge vents so you’ve more space for panels…
            I could have fit 1-3 more panels on my roof were it not for the vents.

          • I put in ridge vents on my old house back 20 years ago. The only time I’ve ever done a full roofing job (by myself).

            Thanks for this info, too.

  • TBH

    Regarding the comments on savings account interest rates: http://www.bankrate.com has some helpful calculators if you’re in the market for a new account. I currently receive 2.2% at Ally Bank and have loved them since switching around 2010. It is online only with no brick and mortar locations, so it might not be for everyone, but there are options out there besides the big banks paying you next to nothing if this would work for your personal situation.

    • 2.2%? Nice.

      That would be about $29 at the end of the year in the above example.

      • TBH

        I am a fan! I am like most Americans in that I don’t have a very strong savings account for a variety of reasons, but it all adds up. I do like having $29 more than $0!

      • Glsai

        I do know someone who did something similar. Claimed at a higher rate, put the extra money they got from their paycheck into a savings account. When tax time came they paid what they owed out of their checking account. Years down the road they were reconciling their accounts and discovered 10s of thousands of dollars in that savings account from the compound interest and money put there over the course of years. I wouldn’t be angry at that! I don’t have quite the fiscal discipline to do that yet (plus there seems to be increased penalties for under payment these days).

        • Brian Simon

          Well, that’s a nice anecdote, but it’s going to take more than $2.20 per year, or more years than most people work for compound interest to reach “10s of thousands of dollars.”

          • Glsai

            Let me clarify my anecdote. I’m going to use totally made up numbers.

            Say your weekly paycheck is $1,000 pre tax. Say your taxes are $300 per week if you claim how you should. You then change your withholding so you only pay $200 in taxes. You then take that extra $100 a week and put it in to a savings account. At the end of the year you have $5,000 in that savings account. Then come the end of the year when you have to pay in the government will say you owe $5,000 instead of paying it out of that savings account, you pay it out of your normal day to day checking account that you use for other bills. Then that $5,000 accrues each year and collects compound interest. That adds up to a lot of money over time.

            Now I don’t know the specifics of the person in my anecdote to know exactly how much they were putting into that savings account each paycheck. Maybe it was only 500-1000 each year. But it will add up.

          • CB

            It will add up, but not from the interest. It’s basically moving money that would go to your checking to a savings acct. I’d think it would be easier for most people to pay that extra $100 to the gov’t weekly than come up with $5000 at tax season.

  • EXACTLY!

    I’ve been telling people that very thing for the better part of this past year.

  • Sonny T

    There is no such thing as required withholding on individuals.

  • Frank

    There is a better way to save money than by letting Uncle Sam hold on to it for you.

    A number of credit unions in Minnesota have WINcentive saving accounts. Put $25 in, you get one chance to win prize money, both from the CU you’re account is at, and in state wide drawings. I won $100 last July. You can make a withdrawal after one year.

    Open up one of these accounts in January or February, and set up automatic deposits. Need to pay Uncle Sam or MN Revenue? You’re covered. Or maybe you’ve got $$$ to head to somewhere warm for a week, a drink in your hand with your toes in the sand.

    https://www.mncun.org/mpage/FindACreditUnion