It’s the time of year again when many people (except those who like to wait until April 14th) are thinking about their income taxes and whether or not they will get a refund. In the blogosphere there has also been some attention given to this issue in regards to how blog income needs to be reported (John Chow recently wrote several posts on this issue) and other tax type advice.

While I don’t need to worry about reporting my blog income (because there isn’t any to report) I still have to file a federal return. In regard to federal returns, many people (generally those who have plenty of money) will say that getting a tax return is not a good thing because it means you overpaid your taxes throughout the year and had basically lent the government money interest free.

I see the point that is being made here, but don’t agree that it is a bad thing. There are several reasons that I see an income tax return as being a positive rather than a negative. Now, I’m not advocating overpaying your taxes to the point where you get $5,000, $10,000 or more back each year, but having a return of say $500 - $2000 can be a very nice thing depending on one’s income level.

The income level point is very important here. For someone who is not living the “high life” and doesn’t have large account balances just sitting around, getting an income tax refund can be very helpful.

As I stated before, the main argument against tax returns is that you are loaning the government money “interest-free” and could be earning that interest yourself. However, if you get a return of $1,000 and had that money invested how much interest would you have really earned? Well, $1,000 divided by 12 = $83 per month you could have been investing. At 5% return compounded monthly you are losing out on approximately $325 over the course of the year. However, for most people that additional $83 per month would not be invested at 5% interest. At most, it might end up in a low yield savings account. In most situations, however, it is more likely that the extra money would be spent every month and you will be no better off than getting it back at the end of the year. In this case, it can be thought of as a sort of forced savings plan.

Why can it be so nice to get a tax refund? Well, for one thing, it can provide an opportunity to treat yourself or make a large purchase. If you had this extra money each month it would be figured into your budget and it would be that much harder to collect enough money to make the purchase. Ideally, in my mind anyway, an income tax return between $500 and $2000 makes it a nice little bonus that can be used to buy bigger ticket items that may be difficult to save for otherwise.

Another aspect is that it can perhaps make your budget easier to stick to. For example, my car insurance is always due around the same time that I get my tax return. While I cannot always predict exactly how much I am going to get back and still need to plan for this without counting on the return, it makes my budget much easier to stick to by being able to pay car insurance with my tax return.

A final benefit of getting a tax return that I am going to mention here is that if you are getting a return, you do not have to pay in. Having to actually pay in for taxes, while you could possibly have earned some interest on the extra money, could be very detrimental to one’s budget if it came unexpected and was not worked into a budget. This is especially true if that person does not have piles of money sitting around.

Is getting an income tax return the way to get the most out of your money? When looking at the possibilities of lost interest, no. However, because the excess amounts paid in would likely have been squandered over the course of the year rather than invested wisely, the benefits of not getting a tax return are almost eliminated. For these reasons, I am going to disagree with many of the so-called “experts” (who almost undoubtedly fall into the category of having plenty of large account balances) and say that for the average person, getting an moderate income tax return (such as the $500 - $2000 figure I mentioned earlier) is a very good thing.