Tax Refunds: Fools' Gold?

With April 15th lurking around the corner, financial guru Dave Ramsey has been receiving lots of questions about taxes.

And, since more than two-thirds of filers got refunds last year, it's no surprise that the majority of those questions concern refunds.

What may be surprising is the attitude of the author and radio host about refunds.

In Part One of The Early Show series, "Tax Tips," Ramsey observes that most people are happy when they get their refunds. They feel as if it's Christmas in April.

But Ramsey says, "Christmas is in December, not April."

He points out that, when you receive a refund, you're not getting a "bonus," you're getting your own money back. It's like lending a friend $10 for lunch and being repaid two weeks later: You're not suddenly $10 richer; you're just back where you started.

Receiving a big tax refund is actually a sign of poor financial planning, Ramsey stresses.

Among the questions asked of Ramsey, Eric in Ohio writes, "What should I do with this huge tax refund I am receiving: Go to Hawaii?!"

Ramsey responds quickly that Eric shouldn't be getting a refund. He is having too much money taken out of his paycheck for taxes each month and, essentially, it's being kept in a government savings account that pays zero interest. It's kind of like Eric is sticking this money under his pillow instead of putting it to work. Who would voluntarily keep "extra" money in a place where it earns no interest?

However, if you're in Eric's shoes and receiving a big refund this year, be smart about using the money. This is not an excuse to go out and buy new shoes or a TV! Instead, use the money to build an emergency fund or pay down debt. If you've already done these things, invest the money in a retirement fund such as a Roth IRA.Ronald from Arkansas asks, "How do I convince my wife that getting a big tax refund is not a good thing? She is scared of owing the IRS (Internal Revenue Service) money, and isn't rational on this issue."

Ron is right, this isn't a rational fear, says Ramsey. It simply doesn't make sense to receive a refund. When it comes to the family finances, women are natural worriers: Women, more than men, have a real need to feel secure. So perhaps this insistence on holding onto the refund makes her feel more secure.

It's understandable that she wants to have $2000 to rely on, but wouldn't it be better to have this money whenever the family needs it, instead of in April? By keeping more money in your paycheck each month and putting the "extra" away in an emergency fund, you'll have access to the money whenever you need it throughout the year.

That said, you don't want to underpay the IRS and have to write a big check to the government at tax time.

Most people realize that changing their withholdings or allowances on their W-2 forms at work will change how much tax money is withheld from their paychecks. However, figuring out how many allowances to claim can be tricky. Let your human resources people figure it out; that's what they're trained to do!

If you consistently receive a refund of about $3,000, tell your HR department that you would like $250 less to come out of your paycheck each month. They will tell you how to change your W-4 accordingly.

Finally, Debbie in Tennessee writes, "I recently discovered that my new husband has not filed taxes for the past three years. He says it isn't a problem because they owe him money. What are the consequences?"

Failure to file taxes is a criminal act, Ramsey replies. The IRS sent 2600 people to jail last year for not filing. So, this isn't a game. And it doesn't matter who owes who money. In this case, if he's telling Debbie the truth, her husband should be receiving money from the government and, says Ramsey, "not claiming it is just plain stupid!"

Ramsey had one last thing to touch on concerning refunds: tax preparation companies continue to advertise their "rapid refunds" or "refund anticipation loans." Basically, after seeing how much the government owes you, the company offers to lend you the money right away.

Never avail yourself of offers of that nature, Ramsey says: The loans usually come with an absurdly high interest rate. It's worth it to just wait a few extra weeks and receive the money directly from the government. Plus, if you file your taxes electronically and have the refund deposited directly into a bank account, you should receive it in 10 days or less.