Why You Don’t Want a Big Tax Refund
Most people would not complain if they got a big tax refund. After all, who doesn’t love free money?! It’s easy to think about a check from the IRS as “found” money and plan a shopping trip accordingly. However, getting a rather large check is not actually as beneficial as you might think.
Big tax refund = LOSING money
When you get a tax refund, you have basically given the government an interest-free loan. You sent them more money than was needed to cover your tax obligation, and they are returning the excess to you.
This means you've missed out on a year's worth of interest you could have been earning… if you had placed that money with an institution that would have paid you interest.
Should you adjust your withholding?
If your refund is only a few hundred dollars – or any amount that is not significant in relation to your income – there is no need to do anything. If you are getting back what you consider to be a large amount of money, you should adjust your withholding to have less deducted from your paycheck. You can use the IRS withholding calculator or talk to a tax professional to determine an appropriate amount to withhold. Then file a new W-4 with your employer.
Make the money work for you
Adjusting your withholding means you’ll have more money in your paycheck. Do not use the difference (or a refund) to upgrade your lifestyle. It’s much smarter to put it in retirement savings, pay down debt, or start/replenish your emergency fund. Make that “extra” money work for you by using it to strengthen your overall financial position.