Government, Personal Finance, Taxes 
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Tax Refund = Free Loan to Government?

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SMB discovered she was getting back over $4200 and Jane Dough learned she was also getting one back too (it’s a secret!) but that she wasn’t going to beat herself up over giving the government “an interest free loan.” Is getting a refund and giving the government an interest free loan that big of a deal?

Let’s say you could get an easy 4% a year on that money, how much did you really give the government? The mathematically simple answer is that you give up $40 per $1000 owed, so SMB gave up ~$160 in interest pre-tax. I don’t know what tax bracket she’s in but if she’s in the 25% bracket then she’s really only giving up $120 in interest after taxes. The mathematically complicated answer involves dividing your refund by twelve, calculating how much each month earned and summing it all together, but the mathematically simple answer is the maximum (if you overpaid your taxes on Jan 1st, which you didn’t) you “gave up” so it’s good enough.

SMB and Jane have it right, don’t beat yourself up it.

(The funniest thing is that you actually already give the government a pretty interest-free loan in the form of social security and not many folks mention it. 6.2% of your salary goes to fund social security and you aren’t getting that great of a return on it, if it even will exist when you retire. Here’s a quick calculator for how much you’ll get when you retire.)

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5 Responses to “Tax Refund = Free Loan to Government?”

  1. Bret says:

    My goal has always been to owe a little money at the end. Although if you owe too much, then a penalty must be paid.

  2. Dus10 says:

    Yea, SS is a horrible interest free loan! I figured it up and I will be getting the same amount as I would by putting all of that in a jar until I was 65, and then getting a 10%. 45 years worth of compounding should be worth more than $0.

  3. Matt says:

    Yeah, Social Security is a bad loan if you consider it a loan. If you realize that it’s not a loan, but rather a scheme for the institutionalization of intergenerational robbery, then you have a realistic picture.

    I wish there were a way for me to lend less of my money to the government every year (I always get a huge refund because of Schedule C writeoffs)…but it’s more a principle thing than an issue of earning more interest.

  4. Herb says:

    SS isn’t a loan, theoretically what you pay now is used to pay current retirees. When you’re retired, you’re children will be paying to fund you’re monthly SS check. The key here is that SS is not an “investment”, loan or a retirement account for you or anyone else. From my standpoint, it’s meant to help ensure that retired Americans have some basic level of income to ensure they’re not destitute in retirement. The problem is that the boomers generation doesn’t seem to understand that concept, so they don’t save much and are expecting SS will be their 401k.

    On a related note, did anyone read the article in Kiplingers this month about the changes in Medicaid nursing home care? About the family that had to sell their childhood home to pay for their father to be in a nursing home (boo hoo!)? It’s ridiculous that people would think they can hang onto all of their personal assets and at the same time expect the government to pay their living expenses. Of course you should have to liquidate all of your assets before you come asking for the taxpayer’s help! It seems people still don’t understand the concept that if you want a great social safety net (like Europe), you have to pay a lot in taxes (like Europe). If you don’t want to pay more in taxes, then don’t come crying to the government when they don’t have any money for you

  5. Andrew says:

    You’re underestimating how much social security is taking. They also take 6.2% from your employer who can then afford to pay you 6.2% less.


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