Every year my partner and I usually get a big tax refund. In total, we received about $4,500 this year, which is around $1,000 more than the average tax refund. Many personal finance experts say you should adjust your withholding if you receive large tax refunds to avoid giving the government an interest-free loan. However, getting a large tax refund has some underrated financial benefits. Here’s an overview of all the pros and cons to help you decide how to handle your withholding.
Pros of Large Tax Refunds
One of the main benefits of getting a large tax refund is that it’s a form of forced savings. Despite our best efforts, some of us aren’t as good at saving money as others. If you tend to spend any extra money you have after your bills get paid, getting a bigger tax refund could help you save more.
Financial behaviorists say that people tend to view small sums of money differently than large ones. You’re more likely to fritter away an extra $200 per month than a one-time windfall of $2,400. Many people have an easier time putting large sums of money to good use. So you may be better off receiving a bigger tax refund than more money in your regular paychecks.
If you go this route and get a bigger refund, make sure you don’t squander it. Deposit it directly into your savings or brokerage account as soon as you get it so you won’t be tempted to spend it.
Less Chance of a Surprise Tax Bill
When you adjust your withholding to get more money in your paychecks, you run the risk of overshooting the mark and owing the IRS money at tax time. Before you change your withholding, make sure you have enough money saved so you can cover a surprise tax bill without going into debt.
Personally, I don’t mind overpaying my taxes a bit throughout the year because it gives me peace of mind. I know my partner and I are unlikely to owe Uncle Sam money, which makes tax season less stressful.
Cons of Big Tax Refunds
It Could Take a While to Get Your Refund
Unfortunately, tax refunds aren’t always issued promptly. As of this writing, my partner and I still haven’t gotten our state refund.
I’ve also heard that the IRS has a backlog of paperwork, so many paper filers haven’t received their federal tax refunds either. During the pandemic shutdowns, the IRS got behind on processing Form 1040 paper returns and still hasn’t caught up.
Your tax refund can also be delayed if your return requires a manual review. This may happen if you make mistakes on your tax return or submit an uncommon form.
It can be annoying having to wait an extra four or five months to get a large sum of money you’re owed. If you don’t want to deal with delays, it may be better to adjust your withholding so you get more of your money in your regular paychecks.
You’ll Lose Out on Investment Gains
The biggest disadvantage of receiving a large tax refund is missing out on investment gains. Waiting to receive a big chunk of your earnings until tax time means you’re sacrificing a few months of growth.
However, this is a moot point if you don’t think you’ll be able to save that extra money if it’s included in your paychecks. It’s all about doing what you think will work best for you. Remember that you can adjust your withholding at any time if you change your mind about your tax strategy.
Do you prefer to get a large refund or receive more money in your regular paychecks? Let me know in the comments section below!
Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.