How Much Does Your Tax Refund Cost You?

Written by Georgia Credit Union Affiliates

As tax time approaches, many Americans are anxiously awaiting their refund checks; but could their refunds actually be costing them money?

According to the Georgia Credit Union Affiliates' 2011 Year End Consumer Survey, only 1.5 percent of respondents said they plan to make a large purchase with their tax refunds this year. Instead, 36 percent of respondents plan to save their refunds and 44.3 percent plan to use their refunds to pay off debt.

Many Americans like receiving refunds because it forces them to save or supplies them with a large sum of money to make a noticeable dent in a debt. But, is it wise to receive a refund each year, and how much does choosing to receive a refund instead of aiming to break even cost American taxpayers each year?

In 2011, 109.3 million Americans received tax refunds totaling $318.5 billion. The average refund was $2,913. If a taxpayer adjusted his withholdings to keep more of his money throughout the year and aimed to break even at tax time, he would receive $242.75 more each month. By receiving this amount monthly, one could earn interest on that money in savings or pay down credit card debt, thus avoid paying as much in interest charges.

For example, assume a person has a $6,576 balance on a credit card (the average credit card balance in the U.S.) and an annual percentage rate of 13 percent. This person would save $181.42 over the course of the year by paying the extra $242.75 towards the debt each month (in addition to the regular payment) versus paying the total refund of $2,913 when it was received. In this case, opting for a refund would cost the taxpayer $181.42.

An insider's perspective

"When you get a tax refund, it means you basically have been giving the government an interest-free loan," said Paula Kitchens, vice president and compliance officer of Augusta Metro Federal Credit Union in Augusta. "If you get the money in your paycheck each month, you could be saving it and earning dividends or paying down debt and avoiding interest charges."

According to Kitchens, the bottom line is clear - dollar for dollar, taxpayers come out on top when they adjust their withholdings so that they try to break even at tax time. Nevertheless, Kitchens points out that if a person has difficulty saving, getting a refund is a sure way to get a substantial amount of money at one time to save or spend on a planned purchase.

"In the end it definitely depends on the individual," Kitchens said. "It is all a question of what kind of discipline you will have with a paycheck."