There are two camps on tax refund checks, the people who love getting them, and the nay-sayers who chastize you for giving the government an interest free loan all year. We all understand that we could’ve had less taxes taken out of our paychecks throughout the year and invested that excess money all year long rather than simply receiving a lump sum at the end of the year. The cost to you is the opportunity cost of being able to invest it in a relatively risk free mutual fund, or proven dividend stock. Now the gains in the stocket market this year were well above historical norms so I can understand this argument, but all of the 401k experts tell us to expect an average 8% annual return, meaning let’s use that return for a more realistic outlook going forward. So basically you are losing out on 8% of the monthly amount you could have invested all year long. Let’s just forget all those compounded interest calculations, and the fact that you are ONLY able to deposit a monthly portion of that refund check throughout the year, and let’s think what that lost interest means in very simplified terms. If you get a $1,000 refund at the end of the year, and could have made a total 8% annualized return on that $1,000, then you would have $1,080 at the end of the year rather than that $1,000 check from the government. Simple math tells us that you lost out on $80, and believe me this is a very generous scenario.
Ok, nothing new here, you aren’t idiots and you certainly understand that you lost out on a few bucks by letting the government hold that money all year. Next, you are probably thinking “yeah, but I just would have wasted that little bit of extra money each month”. The financial experts agree with that! It’s been discovered that people are much more likely to put good use to the money when it comes through in a larger lump sum payment rather than smaller monthly distributions. But again, this is nothing new! I personally think that there is a time when a large tax refund is better than any stock market investment, and I don’t care about the psychological effects of receiving lump sum amounts either.
Did you know that Amazon is offering a 10% tax refund bonus on your Federal tax refund? This isn’t a promo post, or a plug for Amazon or Turbo Tax, rather this is just me telling you that you not only have the option of receiving a large refund each year, but you also can get a built in 10% return on it as well. How’s that for smart investing? The only rules are that you purchase an Amazon gift card in increments of $100, up to $2,000 maximum, and that you use Turbo Tax to prepare and file that return. That means if you receive the same $1,000 refund I mentioned above then you now receive $1,1o0 in Amazon credit rather than the $1,080 from investing in the market. If you receive a $2,000 refund then you actually net $40 more over the scenario I used above. You might be doubting the benefits of this little method of mine considering that it’s a gift card you will be spending, rather than cold hard cash you should be saving. But let’s face it, you are going to spend money on things this year, it’s really as simple as that. I buy shoes, clothes, movies, music, books, Christmas presents, and countless other things on Amazon each year! Last year I bought a new television set that would’ve justified maxing out my Amazon/Federal tax refund of $2,000! If you’re going to spend it anyways, then I say why not build in an automatic 10% return on your Federal tax refund. To me this is a no brainer! Oh yea, and using an online tax program is easy enough for about 90% of the world, and a tiny fraction of the cost of hiring an accountant. You won’t just save money, but time as well. Meeting with the accountant and lugging your paperwork to and fro isn’t all that much fun either.