Is a Big Tax Refund a Good Thing?

Not unless you like giving interest free loans to the government. 

Stack of Greenbacks

Those of you who filed right away this year you have probably cashed your refund check already.

For years I looked forward to our big tax refund. In fact it wasn’t unusual for us to receive several thousand dollars back from the IRS each year.

Then I realized that the IRS wasn’t giving me money… they were returning MY MONEY! Money that they had borrowed for a year.

All of a sudden that big refund check didn’t seem so great anymore.

If you are working towards paying down your debt, and/or  you receive a large refund every year, my suggestion is to adjust your withholdings by filing a W-4 form with your employeer. By increasing your allowances you’ll receive more money every month in your paycheck.

You can use that extra money every month to pay down your debt, or increase your savings.

Last year we received a $200 refund, which is a huge improvement from the $6,000 refunds we received years ago.

Remember you can use H&R Block or Turbo Tax online and file electronically for free.

Have you ever received a large refund? Did you adjust your withholdings after receiving it? 

 photo credit


This post may contain a link to an affiliate. See my disclosure policy for more information.

Comments

  1. Stephanie says:

    We updated our witholdings about a year ago. But we still received about 2000 back in taxes. That is half of the year before. We are a family of 4, so we with held 4. I believe we could withhold 5, is that correct? We might have to look into that. It is so nice having a larger paycheck, then anxiously waiting for tax season.
    I also have heard that some people get penalized for getting too much back. My brother had the irs automatically withdraw funds from his account because they over paid him. He received a notice in the mail, but it was completed already.

  2. Erin says:

    Not all large refunds are due to giving the government a loan. We receive a huge tax refund every year, but we have our withholdings set to the highest they can be. For us, with the number of withholdings we have and the amount the hubby makes in the military we end up not paying much all year and then we get it back along with the child tax credit, etc.

    Love this post! So many people don’t understand that they could get more money throughout the year. They focus so much on that one big check during tax season. Thanks for the great info!

  3. Beth F says:

    For the past five years, we’ve had nothing withheld from paychecks (I started staying up 3.5 years ago) and we still get pretty big refunds. We have four children and my husband has a small side business and our refund changes depending if it made money or lost money the previous year.

    After doing our taxes this year, I am firmly convinced our system is broken!

  4. Erica says:

    It really depends on where that refund is coming from. If you are getting back more than you had withheld you are receiving money from refundable credits on top of money that you paid in. If you look at lines 55 and 61 on 2011′s 1040 form you will see what your actual liability was. If your liability was 0 you get back everything you actually paid in, and often more depending on what type of credits you are eligible to receive (additional child tax credit, earned income credit, and American opportunities credit are the most common). If you are paying a lot in and you have a low liability you can absolutely change your W4 to have less withheld (and therefore keep more money coming in per month throughout the year) but that doesn’t necessarily mean you won’t still get a big refund, again depending on what type of credits you’re eligible for.

  5. Erica says:

    But basically there are 2 schools of thought on this issue. There are people that really really like to get that big refund so they have a lot withheld and use it to purchase a big ticket item or go on vacation or whatever. Then there are people that just aim to break even. They want to pay in just enough to not owe at the end of the year and they don’t want a big refund. There’s no “right” way, whatever works for you is great and you should absolutely understand the way it works so you can make the most informed decision.

  6. Laura D says:

    We had our first baby last year and was being told by everyone to expect a huge tax refund… haha, ya right. We are getting back $900 whereas everyone else we know is getting thousands back. But having that little extra every month has helped with raising my daughter and allowing me to eat better because I am nursing her. At first, I was mad I wasn’t getting a big refund, but then it occured to me that everyone else was always struggling for money and was looking forward to the big refund to go blow it on tv’s and vacations. We aren’t really struggling (yes, military get paid very little but we make it work!) so we are puting ours into savings.

  7. Stacy says:

    I operate a child care business out of my home, so have to pay self employment taxes and am taxed on my profit each year. Whatever the government keeps from my husband each week we use to offset the taxes I owe at the end of the year. So it is better for us to have more taken out of his paycheck than less.

  8. Angela says:

    My hubby has 4 withholdings on his check (myself and 3 kids) and we still get back $3k plus. I think it’s all because of the child credit. I like getting a refund; we use that money for a one time big purchase. This year it’s paying for our midwife (we’re expecting #4 in August).

  9. Thanks for this post! I only learned last year from my husband doing the taxes that it’s better to owe the IRS than it is to get a refund. The reason being because you can earn interest on the money that you’re making instead of it sitting somewhere with the IRS!

  10. Megan says:

    We got back almost $8000 this year. And without that we wouldn’t of been able to pay our rent for the rest of our lease up front. It was nice since we are living off of 1 paycheck. Maybe in the future when I get a job it will be different, we will see. But for this season, it helped us tremendously!

  11. Tabatha says:

    We have been getting large refunds for years, matter of fact we got our largest refund to date this year (over $8K). That’s when I looked at my husband and told him to change his with holdings. We went from claiming zero, to claiming 4 (we could have claimed 5 but he’s still afraid we’ll owe money at the end of the year). It was a chore to get him to change from 0 to 4 so I’m not complaining! We haven’t received a paycheck yet with the different with holdings so I’m anxious to see what it brings!

  12. TheHappyHousewife says:

    Erin-
    You are right. Our larger returns were in part due to the child tax credit. After years of playing with the numbers, we finally are at a break even point for our taxes. We receive an extra $300 a month in my husband’s paycheck because it isn’t being taken out in taxes. That extra money has allowed us to pay down our mortgage quicker, add to our savings, pay for school and other “investments” over the past few years.

    To me, it makes more financial sense to pay an extra $300 each month to my mortgage principal, rather than to wait until the next year and pay a lump sum of $3,600. :)

  13. TheHappyHousewife says:

    Tabitha-
    Keep us updated! I’d love to hear how the change affected your family’s finances.

  14. RachaelP says:

    Since we don’t make much and have two children, we qualify for just about every credit there is. Plus, my husband is in school. We get, in my opinion, way too much money back. My husband would rather have a big refund than get more money monthly (never understood that) but anyway, even if we had the ‘correct’ number of with holdings, we’d still get money back.

  15. Dana says:

    I’m so glad you brought this up! I’ve never really understood why people get so excited about one big lump of money at the end of the year when they could just get it throughout the year. I think a lot of people use their tax refund as their main saving strategy, and I just don’t agree with that. My husband and I have enough discipline to save on our own throughout the year. We usually just get a couple hundered dollars back at the end of the year, and that works for us.

  16. Jillian says:

    My hubby and I get the big refund and don’t change it because my hubby is a spender. If we were to get the money each month he would most likely blow it before it got into our savings account. So instead, we get the one lump sum which goes directly into our savings account (after tithing on it of course). In this way it helps our marriage to give the government an interest free loan. To me it is worth the money we could have made on interest.

  17. Diana says:

    I am self-employed so pay quarterly estimated taxes. I never like getting a big refund because it means I payed to much money to the government in the first place, and they were holding onto my money.

  18. Jenn says:

    We just realized this AFTER we filed taxes. If you go to the IRS web site, there’s actually a calculator that figures it out for you (what number you should claim on your W4) to get the most amount monthly without owing at the end of the year.

  19. Jennifer says:

    I am the one that does the finances, seeing as DH doesn’t understand it. Yet, DH cannot live within a budget. He will go out and spend money when he feels like it. If he saw more money in his paycheck, he would spend it, despite the fact that on our budget sheet I have allocated it for either savings, an extra mortgage payment, etc. So for us, that big check that we get back, of which he doesn’t know when it comes in or what the amount is unless I inform him, is the only way we are able to put anything into savings. Sad that it has to be that way, but it is.

  20. Carrie de says:

    The Child Tax Credit!!

    We also got $2k+ back, which is odd because I’m a SAHM and DH has one job. So why were the numbers so far off…?

    DH had filled out his W-4 wrong! With our family of 4 on one income, we should have taken 8-9 exemptions instead of only 4-5!!

    Please check your W-4s!! :)

  21. Serena says:

    We claim enough to get a decent sized tax refund, but so that we can also keep quite a bit each month. We’ll be upping it when baby is born next month too. I think a big refund is nice, but I also like to keep as much as we can during the year. I won’t ever change it so that it gets TOO close to having to pay in! :)

  22. Heather says:

    I really feel like we should have an accountant. My husband is a military contractor, so his income is so variable, and about every other year he works overseas for a year or more. The time he is home we get a small refund, but when he’s overseas, because of the foreign income credit, we get a very big refund. I did the witholding calculator on the IRS website, but it says “Based on the information you previously entered, your anticipated income tax for 2012 is $0. If you do not change your withholding arrangement, your withholding for 2012 will approximately equal your tax, and any refund or balance due should be less than $25. B.S. I used my 2011 figures and we got far from 0.

  23. Heather Brandt says:

    How do we know how many we can withhold? We’re a family of 4 total & I thought we were whitholding our max but now I’m wondering if we are since we are getting a lot back.

  24. Angie Walters says:

    YES YES and YES! We were getting $6-7K back each year, and we now with hold 10 to get more back per month and just get a couple hundred at refund time. We’re a family of 4.

  25. Kate says:

    Here’s a link to the IRS withholding calculator. It includes sections for each item that can affect your federal tax liability (including anticipated credits). From here, you should really be able to zoom in on what changes need to be made to find the correct balance.

    http://www.irs.gov/individuals/page/0,,id=14806,00.html

  26. Melissa says:

    What your not understanding here is that the Government DOES NOT HOLD your money THEY USE YOUR MONEY and THE INTEREST they earn each month on that money. This is money the government plans on having to use for NICE Streets you drive on, the street lights that control traffic, officers that maintain order and firemen that save lives. So DO NOT see it as a trick the government is trying to pull on you BUT instead see it as you helping the government earn money and then they in return give you back what you deserve plus more (credits).

  27. Grace says:

    Yes, every tax season, we used to choose turbo tax free online edition, now we use it advanced edition for more refund as incoming goes up. Though the tax software costs us a huge (actually not very dear with coupons offered from sites like AnyCodes), it’s worthwhile.

Speak Your Mind

*