Why getting a refund shouldn’t be your tax goal

You get a tax refund when you have more in refundable credits, tax withholding, and estimated payments than your tax liability.

It’s just like the change you get back at the store when you pay more money than the cost of what you buy.

Except instead of paying and getting that change back within a few seconds of your purchase, it takes a full year to complete the cycle.

You earn income and make tax-relevant choices all year long. From January 1 to December 31—and even into the new year for some decisions—you put things into your virtual tax shopping cart that affect your tax liability.

You also prepay toward that bill through withholding and estimated payments. And maybe you find a coupon or two in the store also.

Imagine what grocery shopping would be like with this kind of annual cycle. You spend all year tallying up a bill and prepaying toward it.

What would your goal be?

To get a lot of change back at the end of the year? What would that cost you throughout the year? It would mean overpaying toward your groceries throughout the year, having less cash to pay for other things.

Now, you wouldn’t want to go all year without paying toward that grocery bill, but you also wouldn’t want to tie up free cash just to get more change.

And a tax refund works exactly the same way. You tie up free cash to make sure you’ve overpaid your tax bill.

And that isn’t bad. It just isn’t good, either.