Is Your Tax Refund Too Big?

Posted May 9, 2023

Q: I’ve filed my taxes, and I’ll be getting a sizable refund! I love getting free money in my account, but I’ve heard this may not be a good thing. Am I doing something wrong?

A: Everyone loves getting money from the government, but your concerns are valid. Let’s take a look at why an extra-large tax refund may not be in the taxpayer’s best interests, and how to lower future refunds. 

What’s Wrong With a Big Tax Refund?

First, it’s important to note that a tax refund is not “free money” from the government. A tax refund is actually the government’s way of returning the extra money you paid them during the year. 

When you lend the government this money, they return it dollar-for-dollar without paying interest. If you landed a $3,000 tax refund this year, it means you’ve given the government a $3,000 interest-free loan!

Finally, consider the other ways you could have used these funds during the year. The extra padding in your paycheck could mean having some breathing room in your budget. If things are extra-tight now, that missing money may have put you over the edge and into debt. Or, maybe you would have put that money toward savings. 

How Do I Know If My Tax Refund is Too Large?

The average tax refund for the 2021 filing year was $3,039. If your refund is close to this amount, or it exceeds that, it’s likely too large. Make sure you take steps toward lowering your refund amount for future tax years.

However, under some circumstances, a taxpayer may actually be better off with a big refund. For individuals who are unlikely to save extra money throughout the year and would squander it, getting one lump sum as a tax refund once a year may lead to better money choices. 

How Do I Lower My Tax Refund Next Year?

If you’re a salaried worker, ask your employer for a new W-4. Check your withholding amount, and see how you can adjust it to have less money withheld each month. Claiming more allowances on your W-4 will decrease the amount of money withheld on each paycheck. You may want to speak with an accountant to make the best choices on your form. 

If you found yourself with a large tax refund this year, consider putting the funds into a certificate account. Our competitive rates will help your tax return money grow! 

Categories: FinancialAdvice