It might not sound like good news, but the average tax refund amount is getting smaller. Last year’s average refund was $1,949—still a significant amount, but not nearly as much as the year before. And that is good news.
Big tax refunds certainly are exciting, and they’re far better than finding out you owe the government more money than you’ve already given them, but they’re also a sign that you’ve mismanaged your money. You see, that refund is essentially money you’ve loaned to the IRS interest-free all year long.
And believe us when we tell you that there are far better things you could be doing with your money. Like spending it on your day-to-day expenses, for starters. Or saving it in an account where it will actually earn interest. Or investing it. Basically, anything you could choose to do with your money would make more financial sense than providing an interest-free loan to the government.
That’s why we’re squarely in favor of aiming for a zero-sum tax return, or even owing a little bit (just not owing so much that paying it becomes a burden)!
Why A Big Refund is Bad For Your Bank Account
The immediate problem with big refunds is the tendency to see it as “free money,” and to spend it as such. And sure that’s fun, and sure it could be exactly what you needed to stave off the existential angst of grinding it out under an unfair capitalist system for another year. But this is a respectable financial blog, and it is our duty to tell you that you shouldn’t just blow that money the second it comes into your bank account. Doing so is financially irresponsible, and that’s exactly what we’re here to rally against.
But let’s pretend for a minute that you’re going to treat your big tax refund responsibly and not just use it as an excuse for a big night out or some new expensive toy. Even if you invested your refund right away, you’re still doing yourself a disservice.
That’s because a big refund means that you’ve been sending the government more money than you actually owed them, and that you’ve been getting nothing in return. If you borrow money, you expect to pay it back with interest. So why wouldn’t you want to earn interest when you pay out a loan to someone else (especially to a government that can definitely afford to pay you back)?
How to Balance Your Tax Payments Properly
Once you’ve come around to believing that it’s better to not end up with a big refund from your taxes, the next step is actually making that happen. Start by looking at your past tax returns to see how far off they’ve been (on average). If your big refund was a one-time thing, you probably don’t need to worry about a thing. But if it’s been an ongoing occurrence, it’s time to make a change.
Next, make sure you review the W-4 forms you file with your employer. They set the amount you withhold from your paychecks for taxes, and it’s a good idea to make sure they’re up to date with any major life changes (marriage status, number of kids, etc). These forms are the key to getting your tax payments dialed in and achieving that perfect balance where you maximize your paychecks and minimize your refund.
Achieving this balance can certainly be tricky, and it’s a perfect opportunity for you to check in with a tax professional who can make sure you’re good to go!
Smarter Choices for Your Money
Dialing in your tax withholdings will get rid of that big, juicy refund, but it will also feel like giving yourself a raise in your regular paycheck. And the best thing you can do with that extra money is convince yourself that it’s not there at all.
If you can split your paycheck and automatically deposit some of it into savings, do that. Take that extra amount you get in your paycheck from recalibrating your withholdings, and put it into savings right away. Do not pass go, but do collect $200 (whether right away or eventually).
You could also invest it into your IRA or 401(k) plan, add it to your debt payment contributions, invest it… or spend it on basic necessities. Basically anything you do with your money is going to make more financial sense than what you used to do with it—loan it to the government, interest free.