We know that sounds crazy, but we’re not talking about minimizing your tax refund through credits and deductions at filing time. We’re talking about adjusting your withholding if you are consistently receiving large refunds year over year. This means that you’re likely paying the government more than you should. Why would anyone want to do that? That’s money that you could be using during the year!


We’re not advocating owing taxes at filing time either, but you should try to get as close to break even as you can. This is the perfect time of year to review whether you need to make any changes. As you prepare to file your 2010 return, look over your numbers. How does your withholding number look compared to what you actually owed? Do you think you need to make a change? If you’re unsure, there is information on the IRS website and a withholding calculator to help you determine.


Arguments for large tax refunds

There are those who would argue for large tax refunds. They may like the excitement of getting that money or feel it’s the only way they can save for that summer vacation every year. Here are some common arguments we have heard and our reasoning about why they don’t work.


  • It feels like free money – While it may feel that way, it certainly isn’t “free money.” It’s your money that you worked for! It’s just being given back to you later than you should have received it. If you’re withholding taxes from your paycheck at a higher rate than necessary, you may really be missing out during the year when the money could be useful (even if it’s for savings).


  • It’s the only way I can save – Whatever it’s for, some argue that they count on the refund as savings. And if it is a significant chunk of money, you may feel that you don’t have the discipline to save that much money on your own. But it’s completely interest free! And even though interest rates are low right now, some really is better than none! Compound interest has a major impact on saving money, which you can’t take advantage of it you are getting that money back in a refund. So, a simple way to alternatively save is to set up an automatic savings plan that takes the additional amount you might received in your paycheck due to adjusting your withholding and transferring it into a savings account the day your check is deposited. All you have to do then is not touch it. And since you were living without that money before, you should be able to continue to do so.


Take some time to review your withholding, even if you don’t make any changes. It may be worth knowing just how much you may be missing out on during the year.