Are tax refunds good or bad?

While it may feel like you’ve hit the jackpot when you get your refund check, is getting a big refund from the IRS really such a good thing? What are the pros and cons of tax refunds?

There are some pros to getting a tax refund. First of all, it does provide a little extra spending money, especially if you’re recovering from all those holiday purchases. And, you won’t owe a big sum of money to the IRS at tax time which is a good thing if you weren’t planning for that. 

You can use that refund to pay off your credit card, student loan, or other debt you may be carrying. Decreasing the amount of debt you have means paying less interest. Or, you could consider looking into some new investment opportunities or adding extra contributions to your current accounts.

However, many financial planners will tell you that getting a refund is the result of bad financial planning. You should end up owing the IRS money when your taxes are due, but not too much. Ideally, you should end up owing no more than a few hundred dollars if you have the right amount of money withheld from your paycheck. 

This means assuming responsibility for adjusting the exemptions you claim on your W-4 when a significant event occurs in your life, including, but not limited to:

  • The birth of a child
  • Buying a home
  • Marriage
  • Divorce
  • Significant changes in your income

Are you overpaying all year?

If you’re getting a big tax refund, it means that you’re withholding too much money from your paychecks. When that refund check comes, you may think it’s a wonderful thing. But, the reality is that you’re paying for it the other 11 months of the year. And, you’re providing the government with an interest-free loan, as well.

If you were more accurate in reporting your withholdings, you could keep that money and put it toward paying off debt or investing it in something that earns your interest throughout the year. 

For a lot of individuals, receiving that large refund check means going out and impulse shopping instead of investing it or depositing it into a savings account to use when it’s really needed. A good option is to have your check directly deposited into a savings account so you’re not tempted to spend it right away.

Working with a financial advisor can help you decide if getting a tax refund is a good option for you and what to do with it when you get it. Or, if you should correct how much money you’re having withheld from your paychecks and how to use it to secure a better financial future.

Paying the right amount

GYL CPAs and Advisors is a full-service tax and financial consulting firm. Our goal is to make sure that you’re paying the right amount of taxes; in other words, we want to help you keep more and pay less.

As part of our financial consulting services, we provide financial forecasting to help you with planning and reaching your financial goals. Contact us today to schedule a free consultation.