Big Refunds Can Be OK

If you’re set to get a big tax refund check from Uncle Sam this year, you’re also likely to get a lecture from your accountant or tax professional about how you’re giving the government an interest-free loan. After all, the experts say, it’s your money and you should have the use of it. Your tax preparer will probably advise you to adjust your W-4 withholding statement or to trim your estimated tax payments. This year, however, some contrarians are chiming in about the virtues of a big tax refund.

First off, they say, you’re more apt to fritter away the extra money in your pocket on everyday expenses instead of putting it to good use, like investing it or putting it into a savings account. Even if you do put it into a savings account, your gain, given the current interest rate environment, is likely to be minimal. For example, if you adjust your withholding to give you an extra $100 a month and have the will power to put it into an investment that pays 3.5%, your gain by the end of the year would be $21.

Give Uncle Sam that interest-free loan, on the other hand, and you’ll eventually get a $1,200 refund check that you can use in a number of ways. One of the best things you can do with it is pay down credit card debt, which will give you an immediate tax-free return of 12% to 20%, depending on the interest rate the card company charges. If you’d rather indulge yourself, you can splurge on a big-ticket item that you’d ordinarily use a credit card to buy, saving yourself interest charges and stimulating the economy at the same time.