You Could Be Losing Out If You Are Getting A Big Tax Refund (2024)

Published or updated January 20, 2015 by Glen Craig

The stress of doing your taxes is over.

You filed all of your forms and to your joy you’re getting back a tax refund. And it’s a nice sized one too!

It’s awesome, right?

Not so fast.

Getting a lump sum payout after filing your taxes feels great. But I’m going to show you that it may not be as great as you think. There are better ways you can use your money (and it is your money).

Read On asI Tell You 5 Reasonsa Large Tax Refund is Bad.

1) Your large income tax refund is an interest-free loan to the government

When you get back a large refund it means the government was able to hold on to your money over the past year to do with as they wanted.

And what do you get in return for allowing them to hold your money?

You get your money back. That’s it. It was a free loan.

Know what happens if you owe the government money for a year?

Penalties and interest tacked onto what you owe. Even a low-interest savings account gives you something back. So why loan your money out for nothing?!?

2) Inflation

As defined by the Bureau of Labor Statistics, inflation is “a process of continuously rising prices, or equivalently, of a continuously falling value of money.”

What this means is a dollar today will be worth less than a dollar a year from now. There’s a neat little inflation calculator on the BLS site. Plugging in $1000 for 2012 I see this has the same buying power as $1014.65 in 2013. This means I need $14.65 more in 2013 to buy what I did in 2012.

Let’s look at this another way.

3) You May Be Inclined to Spend Your Large Tax Refund

I hear so many people say something along the lines of “I can’t wait until I get my tax refund so I can buy…”

Getting a big chunk of change at once can give someone big eyes to go spending. If you have the money broken out in smaller pieces in your paycheck rather than one lump sum you may be less inclined to spend it all on a big purchase.

According to a survey by Capital One, more than a third of Americans plan to spend all or part of their tax refund. Mint.com reports that the average refund comes out to about $2,800.

So many people plan out purchases based on their tax refunds.

While it’s not a terrible thing I really think creating an automated savings plan is a far better plan, especially when your refund varies from year-to-year. And odds are the new money isn’t being put to savings. It’s probably going to a big purchase or to cover bills from the prior holidays.

4) It’s Your Money!

This is a simple one.

The money is yours. Why wait for it?

Look, if you like lending money out in small pieces just to have it handed back to you in one lump sum at a later point then contact me and I’ll hold it for you! Really. I’d love to have your money growing in my accounts. I’ll give you back what you gave me.

5) You Need the Money In Your Paycheck

I get using your tax refund as a type of savings vehicle. I do. My wife and I do a little snoopy dance when we get a nice refund (our income had been variable the past few years so it’s been hard to adjust our W-4’s for a low refund).

But some people need that money in their paychecks!

If you’re struggling to make ends meet, robbing Peter to pay Paul all year, then a little extra in your paycheck could go a long way to helping with bills and reduce stress. I don’t get struggling paycheck-to-paycheck when you have the power to make that better.

So what to do about a large tax refund?

The goal should be to get as close to zero as possible on your tax return (you don’t owe taxes and the IRS doesn’t owe you a refund).

Change the withholding on your W-4 form so that you can get more in your paycheck rather than pay out more taxes every pay period and get a large refund next year.

If you have questions about your W-4, and your taxes in general, then it’s not a bad idea to consult a tax professional and discuss how you can maximize your money.

Do you usually get a large tax refund?

Recommended Tax Preparation Software: TurboTax |

You Could Be Losing Out If You Are Getting A Big Tax Refund (2024)

FAQs

Why is getting a large tax refund bad? ›

A big tax refund isn't a reason to celebrate if you overpaid throughout the year. Your interest-free loan to the government could have cost you. Many people rejoice each year when they receive their tax refund, but high refund amounts could mean that you overpaid your taxes throughout the year.

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Why might it be disadvantageous to receive a large refund? ›

Receiving a large refund means you were OVERWITHHOLDING from each paycheck, and that's money you could have used throughout the year for other things.

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What is a downside of receiving a tax refund? ›

Receiving a big tax refund is not necessarily a good thing. The IRS does not pay you interest on your money it has held onto throughout the year. If you reduce your tax withholding by adjusting your W-4, you will be able to hold onto more of your own money in the form of bigger paychecks throughout the year.

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Why is receiving a large tax refund a bad thing Quizlet? ›

Receiving a large federal tax return is bad because the government is taking your money, investing it, and giving you no interest for your money.

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Is it possible to get a $10,000 tax refund? ›

You could end up with a $10,000 tax refund if you've paid significantly more tax payments than you owe at the end of the year.

Get More Info ›

Why isn t getting a large tax refund the best money habit? ›

A tax refund isn't a good thing because it's money you could have had access to during the previous year. If you'd received more of your money during the year, you could have invested it, paid off debt, or padded your emergency fund.

Know More ›

Why did I only get a $100 tax refund? ›

If you owe money to a federal or state agency, the federal government may use part or all of your federal tax refund to repay the debt. This is called a tax refund offset. If your tax refund is lower than you calculated, it may be due to a tax refund offset for an unpaid debt such as child support.

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How much will I get back in taxes if I make 100k? ›

If you make $100,000 a year living in the region of California, USA, you will be taxed $29,959. That means that your net pay will be $70,041 per year, or $5,837 per month. Your average tax rate is 30.0% and your marginal tax rate is 42.6%.

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Do you get a bigger tax refund if you make less money? ›

The Department of Community Services and Development encourages Californians earning under $30,000 a year to file their taxes to claim the California Earned Income Tax Credit (CalEITC), a cash-back tax credit, and receive a larger tax refund.

Learn More Now ›

What if I got a bigger tax refund than expected? ›

If you receive a refund to which you're not entitled, or for an amount that's more than you expected, don't cash the check. For a direct deposit that was greater than expected, immediately contact the IRS at 800-829-1040 and your bank or financial institution.

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What is an excessive refund? ›

In cases of erroneous claim for refund or credit, a penalty amount is 20 percent of the excessive amount claimed. An “excessive amount” is defined as the amount of the claim for refund or credit that exceeds the amount allowable for any taxable year.

Why do some people get high tax return? ›

The biggest factor in determining a refund amount is how much you've paid in over the course of the year. Are you making an exact comparison? If the person you're thinking of has more dependents, or a different filing status than you, your tax returns will have widely different results.