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It’s time to stoke up that old debate again-the one about to be heard in break rooms across corporate America between now and April 15th.
Is it good or bad to get a large tax refund ?
Having gotten my W-2 form from my employer, and armed with all the other paperwork I needed, I did my taxes a few weeks ago and got my refund last Friday. It was more than I thought it would be, and although I wasn’t really upset about it (I lowered my withholding last year to try to make it smaller than the previous year), I still felt like I got too much back.
I didn’t feel that way in the past though. I used to be ecstatic to get a sizable tax refund from Uncle Sam, and I would always hope for one. A few years back though, I came to the realization that I could find better things to do with my money than the US Government, and I tried to minimize my tax refund to a degree afterward.
I had a friend a few years back, who after he told me he was getting a $6000 tax refund (he had 4 kids), that it was his “savings plan”. Ironically, he had told me several months before that that he just did not have enough money to contribute to his 401k plan (even to get the company match). To me, he would have been much better off taking that money and putting it into a retirement savings or a savings account, but I guess he did not trust himself not to spend it.
Want to keep your money in your pocket instead of Uncle Sam’s?
Change your withholding- Increase the number of exemptions on your W-4 to keep more money in your pocket. Check out the IRS Withholding Calculator to help you estimate the # of exemptions you should put on the form. I have used this in the past, and it worked pretty well.
What do with your extra money each paycheck-
Use it to pay off debt- If you have debt, you are missing out on paying that down over the entire year (and not reducing the total interest you will pay)
Boost your emergency fund- Increasing your cash reserves is probably a good idea right now for just about everyone, given the state of the economy.
Put that money directly into retirement savings- like a 401k or Roth IRA.
Set up automatic deposits to a savings account- even though interest rates are dropping like a rock (ING Direct dropped their rate again today!), keeping it separated will force you to save.
Do you think large tax refunds are a bad thing, a good thing, or that it doesn’t really matter?
Similar Posts:
- How to Put Next Year’s Tax Refund to Work for You Right Now
- How to Spend Your Tax Refund or Economic Stimulus Rebate Wisely
- Why You Should Prepare Your Taxes Now
- Obama Announces Initiative to Increase Retirement Savings Rate
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{ 11 comments… read them below or add one }
We also adjusted our allowances last year and are also getting a bigger refund than I wanted. We’re going to put the money toward our emergency fund and to replace an aging refrigerator with a more energy efficient model.
I’ll definitely be looking at the IRS calculator again to adjust… I don’t think we should let Uncle Sam use such a large chunk of our money interest free. I’d rather use it for a Roth IRA.
Good post!
On one hand I understand what someone is saying when they prefer a large refund because it is a built-in savings program for the year, but at the same time, that makes them sound irresponsible.
Do you really not have enough discipline to set aside money each month? It comes across as childish to me.
Personally, when I do my taxes at the end of the year, I don’t want to owe anything and I don’t want to get anything back. I think that’s the way the government prefers it as well!
I just read an article on TheWritersCoin.com (this one) that soooort of talks about the same thing. In his article, however, he essentially talks about how taxes are like loaning money to the government and getting no interest on it. Personally, I always find myself needing the refund around this time of year. Maybe it’s something to do with the holidays or my bills being higher because of the winter. I haven’t really given it too much thought. I would love to be able to get some kind of bonus/interest from the government for loaning them that money though ;D
@Christina- Thanks! I need to adjust mine again as well.
@Grant- That’s what I prefer as well!
@Josh- Good article, I’ve been a fan of the writer’s coin for a while. It would be nice if the government would pay you some kind of interest on your refund, wouldn’t it? Sounds like something they could have stuck in the stimulus bill!
Thanks for these excellent tips.. Will certainly help in these trying times.
Tax refunds are bad. I always prefer a small, steady, known income to an unknown, but larger windfall. It makes planning so much easier, and it makes no difference to the end result (assuming it all adds up the same). I normally have claimed single 2, but last year I did single 1 because I had so many changes and unknowns that I had to play it a little safe. After doing my taxes for last year, I’ve now got a handle on all of this, and just changed my withholding back to single 2. That’s another $25 a paycheck going straight to my car loan!
I consider large tax refunds very bad. I would rather pay a little than be owed at all, but also don’t want to have to pay a lot. I am not afraid of having money, and don’t need the government to “save” it for me. However, for one of my friends who gets around $6,000 minimum back, I think it’s what she has to do. She isn’t able to master her money. If her grown child “needs” something, she can’t say no if she has the money. Another friend likes a refund and says she likes to spend it on something unnecessary. That thinking is contrary to mine, because giving me my own money back makes me feel like a fool, not a recipient of a windfall!
@Slinky- I agree, and I have had the same problem over the last few years- having 2 children in 5 years, and my income has changed a good bit (luckily upwards a little!), that I have had a hard time getting it exactly where I want it. But I’d rather have a little more in my paycheck than leave it with Uncle Sam for a year (or longer) and get a large refund.
Large refunds definitely imply that you’re not tax planning properly.
I guess some people like to pay a bit more, because in a way, it’s like forced savings.
But, if you start the planning process before the deadline (Apr 30 here in Canada), you should be able to maximize your earnings without giving the government too much money.
Most people don’t plan, though.
@TStrump- Good point-although some people use it as “forced savings”, it seems to me it is definitely better to plan more carefully and have use of that money throughout the year.