Is Getting a Big Tax Refund Really a Good Thing?
Lots of tax preparers build their brand by promising hefty refunds to taxpayers, but is a big refund really a good thing?
Refunds Cost You Money.
When you qualify for a tax refund, you are receiving money that you paid to the Internal Revenue Service during the year. The IRS held this money for months, but you earn no interest. Thus, your refund is essentially a free loan made to the government. Had you kept the money, you could have invested it and earned some extra income. Even depositing the money into a savings account earning only one percent interest would have been more beneficial than handing it to the IRS.
In addition to the lack of interest earned, your refund will also lose value through inflation. Over time, the value of money gradually decreases, as the cost of goods increases. This means that your refund will have less buying power when you receive it than it would have had during the previous year.
You Could Have Used it During the Year.
Having trouble making ends meet? The extra money you paid to the IRS may have been just what you needed to keep your family afloat. For example, if you receive a tax refund of $1,200, you would have had an extra $100 each month during the year. A tax refund of $2,400 translates to an extra $200 each month.
Unfortunately, because the IRS was holding onto this money, you may have struggled financially. You may have even taken on high-interest credit card debt or payday loans that could have been avoided if you hadn't been giving the IRS more than its fair share.
You're Likely to Spend it Fast.
Because you receive your tax refund in a lump sum, you may spend it quickly. It feels like extra money, so you are likely to make a frivolous purchase with it. However, if you had received the money in small increments throughout the year, you wouldn't have been tempted to waste it on things you don't need. Instead, you could have used it to improve your overall financial situation.
Preventing Large Refunds
If you frequently receive large tax refunds, you can fix the problem by adjusting the withholding on your W-4. By decreasing the amount of money withheld from your earnings, you will boost the size of your paycheck and reduce the size of the refund you receive during the next year.