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March 25, 2010

Is it good to get a tax refund?

Filed under: Simulation, Uncategorized — Tags: , , , — thebalancedspreadsheet @ 12:52 pm

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With the deadline to file your 2009 Federal income taxes about three weeks away many people are starting to receive their much-anticipated tax refunds.  According to a recent article in USA Today, the average refund this year will be $3,036.  While it would be nice to receive such a large check in the mail, the questions needs to be asked, is it necessarily a good thing to get that much money back?

Reasons against getting a refund

The reason why it is not such a good thing is the reason why it is called a refund.  When you get a refund that means you overpaid your taxes for the year.  A refund of $1,200 means you overpaid the government an average of $100 a month! It does not mean you did anything special or good, it just means you gave the government too much money.  Worse yet is the fact that you do not get any interest on your overpayments so your refund is essentially a no interest loan to the government!  For those of us who are trying to get out of debt and budget every dollar each month that is not a good plan as it gives us less to plan with.

How to stop getting a refund

If you have consistently been getting a refund each yeah there are ways in which you can stop overpaying and keep your money in your wallet.  The most common is simply contacting HR or payroll at your work and raise the number of dependants you claim on your W-4.  Claiming more dependants will cause less money to be withheld from your paycheck and claiming more dependents on your W-4 then you actually have is not illegal as long as you are paying enough in at the end of the year.  Often claiming just the number of people in your house will not be enough because itemized deductions vary from family to family which basically renders the IRS withholding tables useless.   Typically I claim anywhere from 4-6 dependents even though it is just my wife and I on our taxes.

My opinion

My goal is not have a big refund each year.  I try to estimate my total taxes each year and usually come within a $100 or so.  But owing taxes is not something I want to have either.  By having approximately the correct taxes withheld each month it allows me to budget properly and gives me more money to save, invest, and spend each month.  If instead I just got a big refund I would be more prone to spending it on big items instead of saving or investing it.  So if you are struggling to pay the bills each month yet are getting a refund each year you probably need to put an end to it soon because you could really use your money now instead of later.    While getting a big refund once a year might seem exciting, you are better off financially using your money throughout the year.



  1. […] The Balanced Spreadsheet asks: “Is it good to get a tax refund?” […]

    Pingback by Friday Fiscals: Landscaping edition | Mighty Bargain Hunter — March 26, 2010 @ 10:59 pm

  2. No it is not in most circumstances. If you get a refund you are just loaning your money interest free. I know people who do this because they say it is the only way they can save money. They should just have the money electronically transferred into saving instead but that’s just my opinion.

    Comment by Oscar At Real Life Money Management — March 27, 2010 @ 9:54 pm

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