Home Taxes Why You Should Try To Get the Smallest Tax Refund Possible?

Why You Should Try To Get the Smallest Tax Refund Possible?

by My Journey to Millions

IRS Building It may seem like a great idea to expect a large tax refund year after year. Many people anticipate their refunds with plans to use them for vacations and other luxuries they otherwise don’t plan and save for in any other way. However, while you may be used to waiting once a year to a decent chunk of change, it is not financial a smart strategy for a number of reasons.

Reasons that You Should get a Small Tax Return

Here are several considerations to make if you do not alter your tax information to reflect having only the tax amount needed withheld from your check:

You Are Loaning to the Government for Free

When you pay in more than you need to, the government essentially gets to hold your money for free for a year. In return, you only get the money back. You do not get penalties or interest towards the loan paid by the government. But what happens when you owe money to the government for underpaid taxes? You are responsible for the interest and penalty fees that is accrued on the loan they have given to you. Surely there are better things you can do with your money than offer it out for free to the federal government.

Realities of Inflation

Inflation is the process of prices that keep rising while the value of money falls. The money you have today will be worth less next year. In this instance, the amount of money you are getting back from the previous year is worth less than had you had less taxes withheld.

Waiting Period

The money you get back during tax time is your money. But it is money you could have accessed all along and not had to wait for it. A better financial move is to auto-deposit $25 or $50 from every pay and save cash for big purchases. Stop waiting for an entire year to have the money that’s yours in the first place.

How To Prevent Refunds

Ideally, you want to be as close to zero as possible when you file your tax return. You want to not owe money to the IRS and you don’t want the IRS to owe you. Speak with your payroll department about the withholding category on your W-4 form. By altering the amount you have withheld, you will be able to bring home more in your check and pay less out in taxes. Your payroll representative should be able to help you calculate the right numbers based on your marital and family status.

This year make the necessary changes to avoid the refund and instead find ways to stash extra cash into a high-interest savings account to prepare for big purchases.

This guest post was provided by Back Taxes Help

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Mike 07/26/2010 - 7:20 am

Logically, I completely agree with you. It doesn’t make sense to give the government an interest free loan when you could be letting that money work for you instead.

But people rarely act logically. I would guess that most people would take the extra $25 or $50 from each paycheck and spend it rather than save it. So in a way they are being forced to save money throughout the year.

Maybe the government should add an option where you can automatically roll your tax return into a Roth? It might encourage more people to start saving for their future.

Evan 07/26/2010 - 8:46 am

This is a guest post, but I actually don’t agree her (well to an extent)
“So in a way they are being forced to save money throughout the year.”
– This right here is the crux of an alright sized tax return argument. Really that $1,000 would have been gone over the course of a year and even if I did save it, what would the interest be? $2?

“Maybe the government should add an option where you can automatically roll your tax return into a Roth? It might encourage more people to start saving for their future.”
– This is a really really cool idea, and an easy one to implement. The only problem is that it would then encorouge saving into a vehicle that doesn’t produce more taxes.

JoeTaxpayer 07/26/2010 - 8:04 am

Evan – I’m one step worse than this.
My best returns are when I owe big (this means higher income) but not enough to kick in the penalty. Instead of lending to Uncle Sam, he’s lending to me interest free.
Note – our income is variable, and I’ve stopped all the W4 exemption tinkering. In most cases, we’ll owe a bit, in a great year a few thousand. Years ago, I’d spend too much time projecting, adjusting, estimating. Done with that.

Evan 07/26/2010 - 8:49 am

I would venture a guess that you are much more structured then most of the country! I would be worried that I would be spending the money throughout the year (a la Nicholas Cage lol)

Kevin M 07/26/2010 - 9:04 am

I’m with Joe (and the article), but I’m a dorky CPA that does a projection close to the end of the year to make sure I’m not overpaying too much.

Sadly, for most of the country a tax refund is the best way for them to save a big chunk at a time. Although most probably just blow the refund on more junk they don’t need anyway.

@Mike – the government does have that plan in place (started for 2009). See the middle column of the instructions here:

Evan 07/26/2010 - 9:19 am

Kevin! I had no idea…thanks for the heads up

Stephan 07/26/2010 - 4:31 pm

i agree mike, the current system is a great way of forcing people to save every year. the only problem is that many many families end up splurging on some luxury when they get their refund check in the mail. id leave the current system in place but create a way for the consumer to be less tempted to splurge and instead encouraged to save the refund check instead!

John 07/26/2010 - 7:48 pm

I used to care about this but I think it makes close to no difference anymore. Interest rates are practically zero. It is sensible advice in general, just now I don’t think it is worth the time. I suppose, if you were paying a credit card balance or had high rate borrowing then it would (but I don’t so…).

Greg McFarlane 07/27/2010 - 12:03 am

Without question, the logical thing to do is keep the IRS bloodlusters waiting as long as possible for your money (at least up to the point where you’d incur a penalty.)
That’s why it drives me nuts when people say, “yeah, that’s logical, but people probably won’t do it.” Why are we on here, if not to exchange worthwhile information as we blog on and comment about personal finance?
Whether you do the smart thing or the dumb thing is up to you, but that doesn’t negate the existence of the smart thing. Would you expect a physician to say, “Heck, you might as well keep smoking. I can’t stop you”?

Darren 07/27/2010 - 2:59 pm

I’m on board with those who owe a bit at tax time. The last few years, I’ve had to do this.

Although it doesn’t feel good emotionally to pay at tax time, it makes total sense logically. You’re holding off on tax payments until the last possible moment, while not incurring extra penalties.

It sounds like a good idea to me!

myfinancialobjectives 07/27/2010 - 6:46 pm

Great post! You should re-post this around tax time so that hopefully more people will be come aware of it! The only benefit I can think of is that you are not constantly seeing it, and therefore tempted to dive into like savings accounts..John also has a good point. Considering the current interest rate situation.

Ed 07/30/2010 - 6:12 pm

Great post on something that seems to be so commonly misunderstood its almost like a second lottery game for the government to have. Its amazing how many people get so excited about getting a big tax return at the end of the year. Are we so bad at saving our money that getting a return on something we overpaid is so critical?
Think of it in terms of food purchases: You could overpay all your bills by 20% throughout the year and then collect back on it later, or you could pay what you owe and save the extra cash for a rainy day. If you dont have a CPA helping you with this the IRS website has a withholding calculator that can help make sure you have deductions setup correctly.


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