The IRS estimates in the current year the average federal tax refund will be close to $3,000. It also is a true statement that most taxpayers love getting a nice tax refund. But…Do you really want the government to hold that money for you all year long?
Clearly there are two trains of thought on this matter. Most taxpayers like getting refunds, most advisors say it is not a good idea. A quick internet search turned up these articles:
- Big Tax Refunds Really are Good
- A Big Tax Refund Is Bad for You
- Do you Want a Big Tax Refund or a Bigger Paycheck?
Here are some points to consider
1) Traditionally financial planners say that by allowing the US Treasury to hold your money you are missing out on interest you may have earned.
2) Currently interest rates are low so a $3,000 may net $20 at current rates.
3) Do you need the money now to get by?
4) Would you just spend the extra money ($3,000 refund is about $60 per week) or are you disciplined and would save it?
5) The extra money could go to setting up an emergency fund.
For disciplined savers a smaller refund is better, if you need the money now for living expenses a smaller refund is better, if the joy associated with the large refund is worth the lost revenue or if you know the money would have been frittered away a bigger refund might be best. Just make sure you consider your personal needs and habits. The final point is if you feel the amount of refund you receive is too large (or too small for that matter) you can ask your employer to allow you to adjust your form W-4. The IRS Withholding Calculator is an excellent tool to help you determine if a change to your W-4 is in order.