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Big tax refunds: love ‘em or hate ‘em?


keep calm and enjoy tax refund1 Big tax refunds: love ‘em or hate ‘em?

I have to say that this year, I am loving big tax refunds. We will be receiving over $5,000 back in state and federal income tax refunds. Even though this means that we gave the government a $5,000+ interest-free loan, I’m so happy we’ll now have $5,000 in one lump sum. In the words of the great British intelligence officer, Austin Powers, yeaaaah baby!

This is the biggest tax refund we/I have gotten since, well, ever. I doubt we will see a similar-sized refund anytime soon. This year is an anomaly because I only worked for 1/2 of a year, and I went back to school and so qualified for the Lifetime Learning Credit. A alum told me that our tax refund would be especially high this year, and I’m glad that turned out to be the case. The money, especially in its lump sum form, will be much appreciated.

Even though many personal finance experts argue against a large tax refund and counsel folks to adjust their deductions so they have more money with each paycheck, I think that big tax refunds, when used appropriately, can be an effective personal finance tool.

Why big tax refunds deserve some love:

  1. It forces you to save for a big-ticket item such as a down payment on a car or a summer vacation, or even topping off your Roth IRA contributions.
  2. By being conservative on your deductions, it minimizes the risk of having to make up taxes at filing time.

So big tax refunds, do you love ‘em or hate ‘em? And what is the biggest tax refund you have gotten?

  • Leigh - The biggest one I've gotten is around $2,500 and I just throw them into savings, so I'd rather have had it earlier! Hopefully this year I'll get my refund down to < $500 again like in 2011. I thought I had in 2012, but I forgot about itemizing! ReplyCancel

  • bluecollarworkman - I think it's awesome! It's like a big present in the mail from Uncle Sam. Thanks Uncle! I know all the junk about how I gave the government a loan basically, but I think of it more as I let the government hold some money safe for me (so that I don't spend it during the year), so that I can get a big windfall once a year!ReplyCancel

    • Well Heeled Blog - "I let the government hold some money safe for me (so that I don't spend it during the year)" <— yes exactly! ReplyCancel

  • krantcents - I hate them! I want use of my money during the year. I try very hard to adjust my withholding to keep the refund low usually a few hundred dollars. I once received a refund of $2-3K, because I made a mistake. ReplyCancel

  • Daisy - With interest rates being as low as they are, it seems more worth it to wait for the refund instead of stressing over trying to figure out how much you owe at the end of the year and not having enough when that time comes.
    My husband and I are in a unique situation as we both work full time and I get paid overtime which I work during tax season and end of year financials. I also teach Barre classes on the side and that income is fully dependent on how many classes I teach so everything is a big jumbly mess :)
    And since we don't spend like we're expecting to get money back, everything can get dumped in savings and maybe save a little extra for
    a fun vacation? ReplyCancel

  • wmwo - I'm a fan personally. Given that my natural tendency is to fritter my money, having a little bit extra taken off every pay period and given back to me as a lump sum is a good thing in my eyes. I tend to be more responsible with larger lump sums. The largest refund I've ever received was little over $2000. This year's wasn't that big, but it was big enough to finish paying off my car yesterday :) ReplyCancel

  • moneybeagle - The way I look at it, your tradeoff is probably 0.5% of your refund. If you can get 1% on an account and save throughout the year, your interest will build gradually so you'll end up getting about half the interest on the refund amount. When you get the money throughout the year, you'll be tempted to spend it, in many cases. If you spend anywhere over 0.5% at any point throughout the year, you've effectively taken away the so-called benefit that sticking it aside and earning interest will gain. When interest rates were 5-6%, there was something to be said for trying to get a refund as close to zero as possible, but now I think the out-of-sight, out-of-mind approach works better for how much people actually save in the long run. ReplyCancel

  • Caesar F - It's like you're paying yourself. I didn't get a big tax refund, but I'm planning to use it on a month payment on my car. ReplyCancel

  • Newlyweds ona Budget - I know there are lots of haters for the big tax refund, but personally, i think in most cases, it works out fine! I know that I LOVE the large tax refund as well. Plus interest rates are like less than 1% , you're not really making that much off of it anyway! AND you risk having to owe, and I know myself well enough that if I got it in my paycheck every month, there is very little possibility that I would actually have a savings account for taxes. It's just not happening. Big tax refunds work out for all involved ReplyCancel

  • @LifeDollarSense - I think tax refunds depend on your situation. I received a large refund this year and wanted to kick myself because I am tirelessly working to payoff debt. I gave the government an interest free loan while I paid interest on all of my own debt. Ouch! But if you are relatively debt free and probably not regularly investing in high return investments, then it can be a nice thing. It can help with a future purchase or savings in a lump sum. Congrats on the refund! ReplyCancel

  • The Asian Pear - I think the biggest I got was $3000 or so.

    I love them… I mean sure, the government had my money for a few months but they were doing stuff with it like paying for my health care and my roads and taking care of national debt. I am totally down with that. I consider the return as a bonus which I will use for investments and splurging. :) ReplyCancel

  • SavvyFinancialLatina - We got a large tax refund because of our education credits too! Next year, we probably won't.

    As far as getting a big tax refund, I think it's useful if you are going to fund a big expense like a down payment, your ROTH IRA (if you invest in a lump sum), car, etc.
    Right now I don't want to mess with our withholding because I don't want to owe any taxes.

    Our tax refund went straight into our savings. Halfway through the amount we need to buy a house! ReplyCancel

  • theoutliermodel - I like big refunds. It gives me a chance to make a big dent in something at once. I know I could get more back per paycheque, but I'm happy to just wait for the refund too. ReplyCancel

  • JW_Umbrella Treasury - We will be receiving a large refund this year, and it's great. We had been waiting to buy some furniture for our apartment, so the timing works out well. I know we could adjust our withholdings so that we pay less throughout the year. But I prefer the peace of mind of knowing that I shouldn't owe any taxes come April 15th. ReplyCancel

    • Well Heeled Blog - What kind of furniture? Recently I've been having an unhealthy obsession with Mitchell Gold + Bob Williams. ReplyCancel

  • Laura Vanderkam - I dislike them. Personally, I dislike withholding too! I think everyone should pay taxes as we freelancers do — quarterly. When you actually see the money in your account, and then have to write a check for it, the reality of tax rates means a lot more. ReplyCancel

  • Brittany - Tax refunds must be bigger in the US! I'm a university student in Canada, and I usually get about $1500 or so back every year, plus a few grants dispersed throughout the year which is usually another couple hundred dollars. Even though I know I'm essentially giving the government an interest free loan, I still get giddy when I get a cheque for that amount, rather than having to write one for school or rent! ReplyCancel

  • pilotsandpugs - I think it's a good idea for some people. For some folks, if they earned more on their paycheck they would just spend more. It can be a good way to force yourself to save I guess.

    I personally don't like big refunds because I get mad the government got my interest. That is just me though. ReplyCancel

  • Budget & the Beach - I don't remember what my biggest one was, but I don't mind getting big refunds. ReplyCancel

  • studentdebtsurvivor - I don't like getting a big refund. This year was my biggest ($1000). I was trying to be at zero owed, zero back but miscalculated because I didn't do as much side work as I'd panned. ReplyCancel

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