5 all-too-common myths about taxes people refuse to stop believing

  • Ramit Sethi is the author of the New York Times bestseller "I Will Teach You to Be Rich" and writes for more than 1 million readers on his website, I Will Teach You to Be Rich.
  • He's found that many people seem to be holding onto myths about taxes, no matter how far they are from the truth.
  • Those myths include the fact that getting a tax refund is always bad, that it's better to earn less so you can pay less in taxes, and that rich people don't pay any taxes.

In my life, I've learned that people really, really like to spout a lot of nonsense about things they don't fully understand, including about taxes and how they work.

And I've found that they like being told they're wrong even less.

My goal is not just to prove people wrong, but to help you make better, informed decisions about your taxes, based on facts.

Here are five common myths about taxes that people get wrong.

TAX MYTH #1: Getting a tax refund back is bad

Anyone ever tell you that getting a tax refund back is bad because you've given Uncle Sam an interest-free loan? The argument here is that you get, say, $600 back from the government. You've supposedly made a money mistake by overpaying because Uncle Sam made an interest on this money when you could've.

The reality is, you would have spent that money anyway.

We know this because small tax refunds that are gradually added to your paycheck get spent. Big tax refunds get saved or used to pay off debt

Technically, the math may tell you to not get a tax refund and owe the government money come tax season, but who actually wants to pay a huge lump of sum? What would you do if you didn't have it?

In truth, owing $600 to the government would affect your life far more than getting $600 back, meaning it's better to get money back than to owe it. Don't feel bad about getting a tax return and using that money to pay down debt or simply save it. It's great.

And even if we assume for a moment that the government IS making interest off of that $600, how much would that be?

At a high-interest account, that is $1.50 per month in interest — ohhh, cha-ching, you might be able to buy a Subway sandwich after four months or so.

That payoff is worse than cutting back on a single latte. 

RELATED: Take a look at the average tax refund taxpayers receive in every U.S. state:

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Average tax refund in every U.S. state
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Average tax refund in every U.S. state

Texas

Average refund: $3,206

Number of refunds: 10,087,693

Total income tax refunded: $32.3 billion

Louisiana

Average refund: $3,115

Number of refunds: 1,611,412

Total income tax refunded: $5 billion

Connecticut

Average refund: $3,099

Number of refunds: 1,396,609

Total income tax refunded: $4.3 billion

Oklahoma

Average refund: $3,098

Number of refunds: 1,300,577

Total income tax refunded: $4 billion

New York

Average refund: $3,059

Number of refunds: 7,712,210

Total income tax refunded: $23.6 billion

New Jersey

Average refund: $3,013

Number of refunds: 3,479,321

Total income tax refunded: $10.5 billion

Wyoming

Average refund: $2,989

Number of refunds: 214,649

Total income tax refunded: $641.6 million

North Dakota 

Average refund: $2,983

Number of refunds: 277,422

Total income tax refunded: $827.4 million

Florida

Average refund: $2,933

Number of refunds: 7,854,538

Total income tax refunded: $23 billion

Mississippi

Average refund: $2,922

Number of refunds: 1,018,429

Total income tax refunded: $2.97 billion

California

Average refund: $2,911

Number of refunds: 13,594,703

Total income tax refunded: $39.5 billion

Washington D.C.

Average refund: $2,900

Number of refunds: 277,399

Total income tax refunded: $804.5 million

Illinois

Average refund: $2,900

Number of refunds: 4,973,653

Total income tax refunded: $14.4 billion

Maryland

Average refund: $2,861

Number of refunds: 2,329,288

Total income tax refunded: $6.7 billion

Massachusetts

Average refund: $2,850

Number of refunds: 2,704,250

Total income tax refunded: $7.7 billion

Alaska

Average refund: $2,843

Number of refunds: 276,887

Total income tax refunded: $787 million

Nevada

Average refund: $2,830

Number of refunds: 1,111,952

Total income tax refunded: $3 billion

Georgia

Average refund: $2,832

Number of refunds: 3,606,774

Total income tax refunded: $10.2 billion

Alabama

Average refund: $2,802

Number of refunds: 1,650,125

Total income tax refunded: $4.6 billion

Virginia

Average refund: $2,771

Number of refunds: 3,129,030

Total income tax refunded: $8.7 billion

Arkansas

Average refund: $2,759

Number of refunds: 989,288

Total income tax refunded: $2.7 billion

Tennessee

Average refund: $2,726

Number of refunds: 2,465,816

Total income tax refunded: $6.7 billion

Utah

Average refund: $2,681

Number of refunds: 1,033,141

Total income tax refunded: $2.8 billion

Washington

Average refund: $2,681

Number of refunds: 2,749,362

Total income tax refunded: $7.4 billion

Arizona

Average refund: $2,672

Number of refunds: 2,244,925

Total income tax refunded: $6 billion

Kansas

Average refund: $2,665

Number of refunds: 1,044,275

Total income tax refunded: $2.8 billion

New Mexico 

Average refund: $2,657

Number of refunds: 724,549

Total income tax refunded: $1.9 billion

South Dakota

Average refund: $2,651

Number of refunds: 321,372

Total income tax refunded: $852 million

West Virginia

Average refund: $2,649

Number of refunds: 649,049

Total income tax refunded: $1.7 billion

Kentucky

Average refund: $2,648

Number of refunds: 1,590,274

Total income tax refunded: $4.2 billion

Delaware

Average refund: $2,648

Number of refunds: 365,749

Total income tax refunded: $968.4 million

Rhode Island

Average refund: $2,643

Number of refunds: 436,490

Total income tax refunded: $1.1 billion

Pennsylvania

Average refund: $2,643

Number of refunds: 5,071,264

Total income tax refunded: $13.4 billion

Colorado

Average refund: $2,636

Number of refunds: 2,014,233

Total income tax refunded: $5.3 billion

North Carolina

Average refund: $2,629

Number of refunds: 3,580,471

Total income tax refunded: $9.4 billion

Nebraska

Average refund: $2,615

Number of refunds: 711,103

Total income tax refunded: $1.8 billion

Indiana

Average refund: $2,612

Number of refunds: 2,577,994

Total income tax refunded: $6.7 billion

Iowa

Average refund: $2,602

Number of refunds: 1,141,151

Total income tax refunded: $3 billion

New Hampshire

Average refund: $2,602

Number of refunds: 558,359

Total income tax refunded: $1.4 billion

Missouri

Average refund: $2,601

Number of refunds: 2,220,029

Total income tax refunded: $5.7 billion

South Carolina

Average refund: $2,569

Number of refunds: 1,719,299

Total income tax refunded: $4.4 billion

Hawaii

Average refund: $2,564

Number of refunds: 535,763

Total income tax refunded: $1.4 billion

Michigan

Average refund: $2,560

Number of refunds: 3,776,668

Total income tax refunded: $9.7 billion

Ohio

Average refund: $2,517

Number of refunds: 4,570,589

Total income tax refunded: $11.5 billion

Minnesota

Average refund: $2,516

Number of refunds: 2,112,212

Total income tax refunded: $5.3 billion

Idaho

Average refund: $2,457

Number of refunds: 561,133

Total income tax refunded: $1.4 billion

Wisconsin

Average refund: $2,436

Number of refunds: 2,236,886

Total income tax refunded: $5.4 billion

Montana

Average refund: $2,401

Number of refunds: 372,817

Total income tax refunded: $895 million

Oregon

Average refund: $2,398

Number of refunds: 1,431,924

Total income tax refunded: $3.4 billion

Vermont

Average refund: $2,392

Number of refunds: 254,192

Total income tax refunded: $608 million

Maine

Average refund: $2,336

Number of refunds: 509,896

Total income tax refunded: $1.2 billion

Average tax refund by state
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TAX MYTH #2: It's better to NOT make more money to avoid paying more in taxes

I came upon a story via Reddit of someone who turned down a raise because he believed he would actually make less because he'd move into the next tax bracket and pay more in taxes.

Excuse me while I go scream into a pillow. That is utter lunacy.

Please, for the love of god, spend three minutes learning about "marginal tax brackets." (Here's a good primer.) Basically, if you start earning more and move up tax brackets, the "marginal" amount — or the money in the higher tax bracket — is taxed at a higher rate. NOT THE ENTIRE AMOUNT YOU EARN.

Anyone who intentionally turns down money or raises to avoid paying taxes is an imbecile. Yes, I said it. I posted about this on Instagram and watched all the trolls roll in refusing to be proven wrong and even calling me a socialist. Me, a guy who runs a business selling products created by talented employees who I pay. That's the essence of capitalism!

I just don't understand people.

TAX MYTH #3: A ton of tax money goes to foreign aid

People get really angry how their tax money is spent, but actually have NO real clue where that money goes. For example, some people think 10% of our tax money gets spent on foreign aid. In reality, it's only 1%! Here's a quick breakdown of where our tax money actually goes:

  • Medicare, Medicaid, and other similar subsidies: 26%
  • Social Security: 24%
  • Defense and security: 15%
  • Safety net program: 9%
  • Interest on debt: 7%

And so on. The point is, people just love to say, "I don't mind paying taxes as long as it doesn't go towards [insert some random thing]."

Thank you, but that's not how taxes work in a democracy. You don't get to pick and choose where each dollar goes.

TAX MYTH #4: The rich never pay any taxes thanks to loopholes

There's a common perception that the rich take advantage of numerous loopholes to minimize or evade taxes. I know a lot about these loopholes.

There are a few legit ones — like tax efficiency in your investment accounts, maxing out your tax-advantaged accounts, and a few more — but not nearly as many as you think. In general, those loopholes are few and far between and largely available to the super-rich who earn millions via investment income (not a normal or even the high salaries of lawyers and doctors).

But there ARE certain loopholes for the super-rich that you probably haven't heard about.

TAX MYTH #5: Your politics don't cloud your rational judgement on taxes

We'd like to think our beliefs about taxes are rational and fair.

Your personal psychology (not to mention your sources of information) plays a huge role in your beliefs about taxes. As Psychology Today noted on a paper about the psychology of taxation, "People have a number of general beliefs about what kinds of exchanges should be taxable, and they want tax law to fit with those beliefs. When tax law conflicts with those beliefs, then people think the tax is unfair."

Next time you hear someone ranting and raving about taxes, ask them this: "It sounds like you don't like taxes. What do you think your taxes get you?"

This does two things:

  1. It shifts the conversation away from the scarcity-based pandemic of people who see taxes as taking something away from them to seeing them as the price you pay as part of a democracy.
  2. When you realize how much this person now hates you, at least I won't be the only one feeling the hate of 1,000 suns. Misery loves company!

My message to you here is simple: The best thing you can do for your taxes is to stop arguing on Twitter and focus on maxing out your tax-advantaged accounts, such as your 401(k) and employer match, Roth IRA, and even HSA accounts (you can learn all about this in the updated version of my best-selling book on personal finance, "I Will Teach You To Be Rich"). All this needless worrying stemming from WRONG information takes away what would truly be in your best interest.

Oh, and please, PLEASE do not refuse to earn more money because you want to "avoid" paying more in taxes.

Ramit Sethi is the author of the New York Times bestseller "I Will Teach You to Be Rich" and writes for more than 1 million readers on his website, I Will Teach You to Be Rich. He's been featured on The Wall Street Journal, CNBC, The New York Times, and more. Sign up here to see why 400,000+ readers LOVE his personal finance advice.

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