Up until March 10 this year, the IRS has already issued more than 59 million refunds worth $174 billion for 2011. This means an average of $2,946 per refund. So if you receive a tax refund this year, here is what it may mean for you.
Much Needed Cash
Receiving a tax refund is a way to receive much needed cash for necessary expenses or investments. If the cash is used for paying off debts, making investments or adding to an emergency fund then it is cash well used. But if it is simply spent for indulgences and luxury items, it is wasted unless you already have loads of money for other more important needs.
A Way to Save
For some taxpayers, their lump sum tax refund is the only savings they can have each year. For these who live hand to mouth, their tax refunds is a way to save which otherwise may never happen especially in this tight economy.
Better than Owing the IRS
It’s much better to overpay and receive a tax refund than to underpay and receive a tax penalty. If you are out of a job or are financially tight you may not be able to pay your taxes straight away. And if you fail to pay off your taxes, you will accrue interest and penalties that can snowball faster than you think. And once the debt spiral begins, it is hard to break. So it is better to overpay the IRS, do with less take home pay each month and receive a refund than to be caught in a tussle with the IRS over our tax debts.
Buffers against Tax Contingencies
It is very common to have circumstances change after you have set your withholding. Receiving a bonus, withdrawing your 401(k), investment income, selling stocks etc are all things that could inflate your tax liability. When these things happen, without sufficient withholding you could receive a rude shock when it comes time to pay your taxes. So being entitled to a tax refund means you have made sufficient withholding and would therefore buffer you against any such tax contingencies.