Tax Refund: Not a Good Thing

A friend of mine is the comptroller of a small corporation. As such, she is required to handle all aspects of that company’s finances including payroll. She takes the opportunity to figure and tweak the withholding from her own paycheck to reach her goal of neither owing taxes nor being due a refund on April 15. 

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She’s really smart and fortunate to be able to track this so closely. Her goal is to always come within $100 of her total tax liability after itemizing her tax return. And she does.

I always wince with pain when a person tells me he or she is getting thousands of dollars in a tax refund. And it’s even worse when they do so with such gusto and pride–like it’s some kind of savings account. A righteous accomplishment. And invariably these are people who carry credit-card debt, convinced that they need it “just in case of emergencies,” followed by, “Hey, emergencies happen!”

It makes no sense for you to willingly overpay your taxes every payday, then depend on credit cards to make up the shortfall when something unexpected happens. Paying double-digit interest on a revolving credit-card balance just adds insult to the financial injury. 

Another friend, a single mother, just recently got $4,500 in the mail as a federal tax refund. She’s is one who struggles, depending heavily on her credit cards to make it through the month. Imagine if she would wise up and adjust her withholding so that the nearly $400 monthly overage stayed in her paycheck. And imagine further that she put that $400 into a special safe place just for emergencies. She would have the $4,500 available to stay out of debt. That just may be the money she needs to live financially responsibly.

Instead, she finds herself deeper in debt than she was a year ago and sees her tax refund as some kind of a windfall–found money, a gift from the government.

I just don’t get why people are so content to over pay their taxes and then receive not even a nickel in interest for having lent it to the government all year long. I hope you just don’t get it either. 

If you have already or plan to receive a big refund in the future, do this: Divide the amount of your refund by the number of pay periods you have each year. Or if you are self-employed, divide by four. This is a rough estimate of the amount you are over paying each pay period, or quarterly if you pay estimated withholding. 

Make an appointment with the department or person who handles payroll and request to fill out a new W-4 form. Ask this person to assist you in determining how many dependents to claim to make the proper adjustment. Or go to www.IRS.gov and use the withholding calculator. If you are self-employed have your accountant make the adjustment to your quarterly estimated forms. 

One last thing. Before you see a dime of this adjustment in your next paycheck, take the steps necessary to make sure the overage does not evaporate or become absorbed in your daily spending. Have that amount automatically deposited into a savings account so you can keep you eye on it and so it will be there when you need it.

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13 replies
  1. txcharley .
    txcharley . says:

    I prepared Income Taxes for over 20 years and this was always my goal for my clients: to pay or get back within $100. Some of my clients thought I was crazy!! They just LOVED getting those huge refunds, but I could never understand it. I DID manage to talk a few people into changing their W-4 and instead having the money automatically deposited into a savings account. And most of them, thanked me for it, but there were a couple who complained because they had to pay taxes on the earnings!!!

    Reply
  2. Mary W.
    Mary W. says:

    How in the heck are you supposed to predict what you will pay in at the end of the year with all the tax law changes? Also, who has a life that is completely unchanged from year to year? I’ve been through unanticipated job layoffs, had to sell my home and am now renting, and have lost various deductions as my kids have graduated and left home. For example, this year my daughter graduates from college and I may lose my Head of Household status. My tax accountants cannot predict how that will play out and advised me to increase my withholding. The advice above only works if you have a completely unchanged life, and even then, it’s a gamble to play it so close. Just my opinion.

    Reply
  3. PH
    PH says:

    By and large, the people getting thousands in refunds didn’t pay that in income tax withholdings. They’re getting credits (aka, redistribution of wealth) that are paid out by the government through the tax refund system.

    Reply
    • Guest
      Guest says:

      You make that sound like a bad thing. I agree that if the credits were being given to people who weren’t working and just collecting welfare, that would be one thing, but as far as I can tell, most of the credits require you to have an earned income of a certain amount to receive. When I was newly divorced, I had alimony I had to pay taxes on, but because I wasn’t working much, I wasn’t able to receive the earned income credit I was able to get later when I was working more. I’ve occasionally felt guilty for receiving such big checks from the IRS, but I figure if it’s legal and they’re willing to give it to me, I’ll take it. Usually those tax checks are the only way for me to build up my savings again after slowly depleting the savings account over the course of the year. It’s been a great blessing for me to get those checks.

      Reply
      • PH
        PH says:

        Just because redistribution of wealth is legal doesn’t make it right… By the way, there is no such thing as “welfare” and the EIC is a form of public assistance (aka, welfare).
        If you ever get to the point of financial health that you pay way more in income taxes than you think is reasonable, you will also likely think it’s “a bad thing.”

      • Babs
        Babs says:

        What is ‘right’, anyway? Is it right to help a hardworking person who is struggling, and not making much money, but still busting their backside to make it?

      • PH
        PH says:

        Is it right to tax a hardworking person who busted their backside in order to make something of themselves and who reaches a certain level of salary and send it off to someone else? Especially if that recipient has “stuff” the taxed person doesn’t have because the taxed person lives within their means…

      • tboofy
        tboofy says:

        What would you do in my place? Not file for those credits because you think it’s “wrong”? If you don’t agree with it, don’t blame the people getting the credits. It’s not like I’m sitting around doing nothing or taking advantage of a system. I’m out teaching your kids (well, someone’s). I’m the single mother of three and make $42k a year. I’ve never received Medicaid, WIC, food stamps, child care assistance, unemployment, cash aid, or housing assistance–all listed as types of assistance under a Google search of “U.S. Welfare System.” (Funny, IRS tax credits weren’t on that list of “welfare” items.) I’m still paying on my student loans, which were an essential expense so I could make the extraordinary sum of money I am (sadly, that’s the wage with a master’s degree). I certainly do not have any more stuff than anyone else. I think my refund was $1500 this year. Not exactly a European vacation amount of money. I got more when I was 2/3 time (couldn’t find a full-time job for a few years), but that was a temporary situation. I still paid for my own insurance (it was expensive) and have never had my kids on free lunch, even though we would have qualified. Don’t assume that getting a check at tax time means I don’t live within my means and have “stuff” that no one else does. Getting angry with me because you pay more than you think you should in taxes doesn’t do anyone any good. If you want to become a teacher and live off my salary and enjoy the benefit of tax credits, feel free.

      • PH
        PH says:

        Why on earth would you think I’m “angry” with you? Seems like you may be projecting or something. I pointed out what the system we have really is (redistribution of wealth) and you chose to reply to my comment.
        I think the system should be changed. ‘Nuf said. By the way, you chose to become a teacher, not me. I also believe in “personal responsibility” – own your choices 🙂

  4. D.
    D. says:

    I agree with a lot of this, but there are some of us out there that are commission based and our companies automatically tax the commission at almost 40% no matter what our chosen with holding are. This end with me getting a refund every year and nothing I can do to put that money back in my paycheck every week.

    Reply
    • gg
      gg says:

      See if your company will take a flat percentage for withholding instead of using the table within their payroll software. Withhold at your tax rate. The software thinks you are making more when it sees the big fluctuations.

      Reply
  5. AP-Tax Prep & ERO
    AP-Tax Prep & ERO says:

    Sometimes a tax refund is the result of credits such as EIC, not necessarily the result of not taking the correct amount of exemptions on the W-4.

    Reply
    • Guest
      Guest says:

      That’s just what I was going to say. I have very little withheld from my paycheck but get significant refunds because of child credits and earned income credits. I own a home and have three children on a teacher’s salary. Granted, I do get child support I don’t have to pay taxes on, but my ex has a salary 10x the size of mine, so he’s paying more than his fair share of taxes on the child support he sends. That said, back when I was married with significantly more income, I was very careful to arrange our withholdings so we didn’t have too much withheld. I can definitely use that extra money every month instead of giving the IRS an interest-free loan all year.

      Reply

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