money·3 min read

Why You Might Not Want a Big Tax Refund

w-4 form adjust witholding tax refund
Design: theSkimm | Photo: iStock
Mar 15, 2022

It's tax season. And the IRS has already distributed about 37 million refunds this year with an average value of $3,401. But while getting a check may feel better than writing one this time of year, there are advantages to receiving a smaller refund. 

Why would I want less money?

Because a smaller refund at tax time means more money each payday. And all you have to do is adjust your withholding. No raise negotiations necessary. 

Tell me more. How do I adjust my withholding?

Your withholding = how much money your employer deducts from each of your paychecks to go toward what you're expected to owe on Tax Day. And you have some wiggle room when it comes to the exact amount. Just submit a new W-4 form to lower your withholding and give yourself an instant raise. 

Time for a spending spree?

Maybe. Or you could use the extra take-home pay to give yourself a financial boost. A few smart ways: paying off some debt, contributing to your savings, investing a little more each month, or upgrading your wardrobe (an especially good investment if you're going back to the office soon). 

What if I’m tempted to spend it anyway?

That’s often why people take the big refund route. You can’t spend money you never see, so letting Uncle Sam hold onto it until tax time helps many taxpayers actually save the money. And there are lots of good ways to use a cash windfall to improve your overall financial situation, too.

So which is a better tax strategy for me?

That depends on your money needs and self-control. Some folks may benefit from slightly larger paychecks simply to make more room in their budgets. Others rely on a big windfall at tax time to cover big expenses like medical treatments or family vacations. So weigh your options and figure out what makes the most sense for you. Oh, and if you go the small refund route, consider automating savings out of each paycheck so it’s still a little harder for you to spend that extra dough.

theSkimm

Many taxpayers celebrate a big tax refund and use the cash windfall for different money goals. But folks looking to grow their savings year-round might benefit from a smaller refund by paying less in taxes throughout the year. And putting that extra money to work asap.


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