Why a Big Income Tax Refund Is Not a Good Thing

By Markets Fool.com

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Source: iamsummersblog.com.

According to a Gallup poll, 45% of American's would prefer to get a tax refund, with over half of those respondents preferring a large refund over a small refund. This makes no sense, as getting a tax refund means you overpaid your taxes to the government during the year. If you knowingly do this, you are essentially giving the government an interest-free loan of money you could have used throughout the year.

Income tax refunds and you
The biggest reason people gave for wanting to receive an income tax refund was that "It's like getting a bonus/reward/nice to get extra money."

While it's always nice to receive an unexpected windfall, if you are expecting a big income tax refund check this year, you're doing your taxes wrong. That "extra" money is cash that you could have been using throughout the year.

Realize that a $1,200 income tax refund means you missed out on an extra $100 a month, and a $2,500 income tax refund means you missed out on an extra $200 a month. And if you're in debt and expecting a large tax refund, that's even worse, because you're basically lending money at 0% interest while your debt accrues interest well beyond that.

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The full list of reasons people gave were as follows:

Reason

Percentage

It's like getting a bonus/reward/nice to get extra money

39%

Forced savings/not good at saving otherwise

17%

To be safe/conservative/don't want to have to owe

11%

Believe taxes are too high

11%

Helps with paying the bills

5%

Use to pay state/local taxes

4%

Use it to buy something wouldn't otherwise/Use for special purchase

3%

Use it on a vacation

1%

Source: Gallup.

If you truly have a problem saving money, then it might make sense to pay the government extra, though there are better ways to get yourself to save money.

In every other case, it makes no sense to hope for a big tax refund. While it's too late to lower your income tax refund for this year, if you want to keep more of your hard-earned money next year, there's a simple way to do so.

Lower your income tax refund next year
When you have a job and earn income, the amount of taxes deducted by your employer from your paycheck is calculated by your Form W-4. On this form, based on your situation, you calculate the total number of personal allowances from withholding you are allowed to take. The higher the number, the less money your employer withholds from your paycheck.

If you have held a job at the same employer for some time and your life situation has changed, your information could be out of date, leading you to have too much money withheld.

This can happen if:

  • You took a second job
  • You got married or divorced
  • Your spouse got a job or lost a job
  • You had a baby
  • Your number of dependents changed
  • You bought a house with a mortgage

If that's the case, check with your employer about adjusting your personal allowances on your form W-4.

More ways to keep more of your money
As Mitt Romney famously (or infamously, depending on whom you ask) said: "I pay all the taxes owed. And not a penny more." Whatever your political leanings, those are wise words to live by. The U.S. tax code contains multiple ways to lower what you owe the government. Be sure you don't end up paying more than what you should really owe.

The article Why a Big Income Tax Refund Is Not a Good Thing originally appeared on Fool.com.

Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, the secret to success in life, what is success to you, the NY Lottery, and the Fortune 500. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.