Ah, tax season. It’s my favorite time of the year as it’s a great opportunity to assess my financial standing from the previous year, as well as plan ahead for the year ahead. Plus, it usually brings a cash infusion in the form of a tax refund! Who doesn’t like getting money, right?

As I’ve progressed in my financial education, I’ve had changing views about the nature of the tax refund, and thus different behaviors as a result. I thought it would be interesting to summarize these stages and explore what behaviors result from them. I am not claiming that this is an exhaustive list, but it does mirror my personal stages of understanding as I progress on my FI journey.

Let’s get started!

Stage 1: A Gift from the Government

This is, sadly, the most common stage I’ve seen. People at this level treat their refund as a generous gift from the government, and look forward to (or worse, depend on) this bonus arriving in the springtime to finance their lifestyles, whether that’s making an extra mortgage payment, credit card payment, or a down payment on a new car. People at this level are often at the mercy of any change in tax policy that could affect the amount of their refund, and may lash out in anger if their refund decreases (see the current #GOPTaxScam trend on Twitter). In general, it’s never good to be in a position in which you are depending on a variable cash infusion (such as a single paycheck, an annual bonus, or tax refund) in order to fund your lifestyle, since if it doesn’t come through as expected you may find yourself in hot water.

Stage 2: Interest-free loan to the government

This second stage of understanding is found among the somewhat more savvy folks who recognize that the money that they get as a refund is actually their money that was overpaid to the government over the course of the year and is being returned to them. Since there is a time value to money, this group realizes that a tax refund is really just a principal payment of an interest-free loan to the government! Having realized this, some take the time to estimate their tax liability for the coming year, and adjust their W2 withholding (or estimated tax payments) in order to minimize the amount of money they loan out so that they can have that money sooner, either for making purchases or for building their own interest-bearing savings. Others recognize this nature of a refund, but also realize that they have little self-control when it comes to building savings and opt to willingly extend this loan as a form of forced-savings. People at this stage are technically correct (the best kind of correct!), but may not be utilizing this truth to its full potential, as we will see below.

Stage 3: Interest-free loan to you

If receiving a tax refund is the government returning an interest-free loan, then the opposite (i.e., owing taxes at the end of the year) would have to be getting an interest-free loan from the government! While true, this perspective has some limitations. The IRS will be more than happy to penalize you for under-withholding your taxes to a high degree, which would completely negate any benefit of the interest-free loan. By adjusting your tax payments to be lower than your actual liability, but not so low that you will get penalized, you can use that money for other money-making endeavors and keep the earnings after you have returned your loan back to the IRS!

Stage 4: Interest-free loan to you + credit card points

After implementing Stage 3, you will eventually be faced with a tax bill when it comes time to file. Most people opt to pay with a paper check or a debit transaction from their bank account, but a third option exists: credit card. Many people might balk at the idea of using a credit card to pay, especially since it comes with a nominal fee, but this option can actually be quite profitable if managed correctly. The IRS has three officially supported credit card payment processors to choose from, listed here. If you use a card that earns 2% value or more on your spending, you can funnel that tax payment through a credit card and still come out ahead even after the fee.

For example, at the time of this writing, the cheapest of the three official processors charges a 1.87% fee on tax payments. If you use a card that earns 1.5 miles (or points) per dollar spent, this is equivalent to purchasing miles for 1.22 cents each at that fee rate. Things get even better if you have a 2% earnings card, as it is equivalent to paying 0.92 cents each. Several mile currencies can be easily redeemed for more value than that, thus this method is an easy way to earn free points, courtesy of Uncle Sam.

Stage 5: Interest-free loan to government + massive credit card points

And finally, stage 5 is really just stage 4 on steroids, but is also reminiscent of stage 2. I mentioned earlier that it is possible to pay estimated taxes in addition to (or instead of) withholding taxes from your W2 paycheck. By timing credit card signups with the quarterly estimated tax payments, you can earn a massive amount of points for relatively little cost!

For example, at the time of writing this list of credit card offers reveals an offer for the Barclays Arrival+ card which promises 70,000 bonus points after spending $5,000 in the first 90 days after signup. The card also earns 2 points per dollar on all spend, gives a 5% rebate on points redeemed, and waives the annual fee the first year. If you were to meet the minimum spending requirement solely by a tax payment:

$4,908.22 tax payment + $91.78 fee (assuming 1.87%) = $5,000 purchase

$5,000 * 2 points / dollar = 10,000 points earned

70,000 bonus points + 10,000 points earned = 80,000 points total

80,000 points * 1.05 cents per point (due to 5% rebate) = $840 value

$840 value - $91.78 fee = $748.22 profit (15.2% of the tax payment)!

Good luck finding any other investment that pays a guaranteed 15.2%, and is tax-free to boot!

This is a typical result for credit card bonus offers available all the time. You can repeat this process several times per year to earn as many points as you need for your next vacation. Just make sure that you can afford to float the payments until your refund arrives! If you can’t afford to pay off your cards in full every month, then this method is not for you! If you have a W2 job, it helps to reduce your W2 withholding as much as possible so that you can maximize how much of your taxes will be paid using cards. Credit card offers are always changing, so with any luck you may find better offers in the future!


This article highlights some different ways of thinking about the tax refund process. As your knowledge of finances progresses, the refund can be viewed in a new light. I consider myself to be on stage 5, as I regularly obtain new cards every couple of months and pay most of my federal income tax using this method. Could there be more stages that lie ahead? Maybe, but I think it would be difficult to beat stage 5 in terms of usefulness. I guess I’ll have to wait to know for sure!