Just Say No to Tax Refunds

The head of the IRS seems to be confirming what we suspected:  the agency is going to enforce the mandate by deducting any penalties from your tax refund, not by using its other enforcement authorities such as the ability to file tax liens.

This bodes ill for the power of the mandate to prevent insurance markets from spiralling out of control; apparently, we're already seeing some evidence of gaming in Massachusetts, though it's not clear how widespread the practice is.  But leave that aside for the nonce, because it's tax season, and I want to point out something that most people seem unaware of:  it is not a good thing to get a tax refund.

Getting a "refund" on your taxes means that you have just made an interest-free loan to the government.  Do you relish the opportunity to make interest-free loans to anyone else, just for the sheer joy of eventually getting your own money back?  I hope not.

If you get a tax refund every year, that means that you're withholding too much.  Go to HR and change that--and then bank a little bit of your salary in an FDIC-insured money market, where you'll at least get a few bucks out of it.  If you're really clever, you'll set that up as an automated direct deposit transaction.  That will give it all the characteristics of your tax refund--the money will automatically disappear from your paycheck before you see it, so that if you don't look at the money market fund all year, you can be pleasantly surprised by your "refund".  The only difference is, your money is working for you, instead of the government.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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