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Tax Refund = Free Loan to Government?

Posted By Jim On 04/09/2006 @ 1:23 pm In Government,Personal Finance,Taxes | 5 Comments

SMB discovered she was getting back over $4200 [3] 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 [4] 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 [5] for how much you’ll get when you retire.)


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/tax-refund-free-loan-to-government.html

[3] getting back over $4200: http://smbmoney.blogspot.com/2006/04/because-we-really-truly-love-loaning.html

[4] beat herself up: http://bostongalsopenwallet.blogspot.com/2006/03/i-did-it-those-taxes-are-done-done-i.html

[5] quick calculator: http://www.ssa.gov/OACT/quickcalc/

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