Is It Bad to Get a Large Tax Refund?

Of course tax time is stressful and confusing. We can list any number of mundane tasks that we’d rather have engaging our free time. I believe that cleaning bathrooms would even contend. However, for a large majority of Americans, completing your tax forms is not all pain for no gain.

According to surveys, 85 percent of Americans expect a refund this year and the average check from Uncle Sam will be just under $3,000. That’s no small chunk of change. Generally, I like to owe a small amount at the end of the year. This year, to my surprise, I failed miserably. I had instead a sizeable refund.

It all begs the question: is it good to have a large tax refund? Honestly, you’ll get different opinions. Here’s why it’s not an easy question to answer.

Why It Is Good

Did you ever wonder what the secret ingredient is for staying out of poverty? Research has an answer, which is growing assets. People who have assets to draw on in times of trouble have the best odds of avoiding poverty. That makes savings a critical element to financial success. The problem is that most Americans aren’t good at saving.

Having a large tax return is a good way to force yourself to save. It all comes out of your paycheck and at the end of the year, you get a nice big refund check to help build your assets.

Also, since interest rates are so low, you don’t really have much to lose in the way of interest. With little to gain in saving, there isn’t much need to fine tune your income tax withholding.

Why It Is Bad

Tax refunds certainly have the potential to work like force savings. The problem is that most people spend their tax refund, they don’t save it. Only 20 percent of tax refunds get used for investing or savings. The rest goes to balancing the monthly budget, vacations, spending sprees and debt reduction.

If a tax return is going to be used for spending, it’s likely to be better received monthly, where it can be directed wisely. It also helps insulate you from unexpected expenses and helps you avoid having to take out credit card debt, bank fees and late payments. If you are going to spend your tax return, you are probably better off bumping up your paycheck and not getting a big windfall that will get frivolously spent.

While it is true that savings accounts earn very little interest, you might be missing unforeseen investment opportunities. Having your money tied up in taxes restricts the use of a large amount of money every year.

Having a big refund is neither good nor bad. It really depends on how you plan on using it and how disciplined you are with your finances.

7 Responses to Is It Bad to Get a Large Tax Refund?

  1. I prefer to get a smaller refund as I’d rather have my money work for me throughout the year as opposed to all at once. That said, you’re right, the issue is how wise you are with the money & not the amount you get.

  2. I normally would be annoyed by getting a refund – Since we live modestly and save and invest the rest, it means that we haven’t been able to use that money as we earned it. This year, though, we got a huge refund, and I was ecstatic. We got the refund not because our withholdings were set incorrectly, but because we bought two rental houses in 2012 and the significant paper losses associated with purchase and fix-up (as well as depreciation and taxes) resulted in the large refund.

  3. I agree with Edward. It all comes down to how the person will be using that money. If you give most people $20 a week for a year they probably won’t have anything to show for it at the end of the year. However, if you give someone a $1,000 they might take part of it and pay off a credit card or other debt. Then again they might just spend it. I think there is a better chance of it being put to good use if someone who is living paycheck to paycheck receives it all at once.

  4. We received a large tax refund and we were ecstatic. We both had education credits which reduced our taxes by a lot! It all went to our down payment savings fund. It helped boost it by quite a lot.

  5. I have the same idea with Edward. it would be better to receive a large amount than small chunks throughout the year. You can use it for more important matters than you can’t usually pay in full.

  6. I am a numbers guy. Not quite as emotionless as Mr Spock, but I lean toward logic.

    Given that the same people who are happy to get these refunds are the same folk struggling to pay off their debt, I’m compelled to suggest that they tweak their W4 (their tax withholding) and get more back in each paycheck. Send that exact amount to the highest rate credit card, probably 18%. Now, in April, when you don’t get back $2000, look at your debt. You owe $2000 less and are saving $360/yr in interest. You just freed up an additional $30/mo and can keep hacking away at the debt.

    If the above is a fantasy, if you really have no card debt, and use your tax refund like a Christmas Club to fund your summer vacation, well, whatever works for you. I appreciate that you made the government an interest free loan.