Why a Large Tax Refund Is Not Always a Good Thing
Why That Tax Refund May Not Be a Good Thing
This is a topic I harp on my family every year, and year after year, my advice is shrugged off. I get it, a lump sum payment every April is a wonderful thing. Some people even plan their vacations or big purchases around it. But here’s the truth most people don’t want to hear: getting a big refund isn’t always a win. In fact, it might mean you gave the government an interest-free loan all year long.
Your Refund Is Just a Reimbursement
A tax refund isn’t “extra” money. It’s money that was already yours, you just overpaid it to the IRS throughout the year. When you have too much withheld from your paycheck or send in more in estimated taxes than you needed to, the government holds onto it and then returns it after you file.
If your buddy borrowed a few thousand bucks from you in January and didn’t pay it back until the next April, with zero interest, you ‘d be a little peeved, right? Then why celebrate when Uncle Sam does it. That’s essentially what’s happening with a large tax refund.
You’re Missing Out on That Money All Year
Let’s say you get a $6,000 refund. That’s $500 a month you could’ve had access to all year long. You could’ve used that to build an emergency fund, pay down credit cards with high interest, contribute to a Roth IRA, or invest in your business. Instead, it sat with the IRS, earning you absolutely nothing.
Meanwhile, inflation is quietly chipping away at the value of that money. The longer you wait to get it back, the less purchasing power it holds.
If you were to take that same $500 a month and put it into a yield savings account at 4%, you'd make about $120 by the end of the year.
Why Do So Many People Overpay on Purpose?
A lot of folks intentionally set their withholding too high because they like getting a refund. It feels safe, and it’s a forced savings method for people who struggle to stash money away.
But here’s the issue: it’s not a very efficient savings plan. There are no returns, no compounding interest, no flexibility. If life throws you a curveball in July, you can’t tap into your “IRS savings account” until tax time. That’s money you could’ve used when you actually needed it.
So How Do You Fix It?
This isn’t about avoiding a refund completely, it’s about getting closer to break even. Ideally, your tax withholding or estimated payments match your actual tax liability as closely as possible. That way, you don’t owe a big bill in April, but you also don’t let the IRS hold onto thousands of your dollars all year either.
Start by adjusting your W-4 form at work. If you’re self-employed, revisit your quarterly estimated payments. These aren’t set-and-forget forms, they should change with your income, dependents, side gigs, or even big life events like getting married or buying a house. This is why having someone like us in your corner is beneficial, no matter what walk of life you’re coming from.
When a Refund Is a Good Thing
Of course, there are exceptions. If you’re eligible for refundable credits, like the Earned Income Tax Credit (EITC) or the Child Tax Credit, you might get a refund even if you didn’t overpay. That’s free money, and you should absolutely claim it.
But if you’re W-2 only, and your refund is coming entirely from over-withholding, it’s time to consider if that’s really serving your financial goals.
Bottom Line
A big refund isn’t a gift, it’s just your money coming back late. And while it feels good in the moment, you might be better off keeping more of your paycheck throughout the year and putting it to work sooner.
Curious how to adjust your W-4 or run your numbers more precisely?
Let’s take a look. We’ll help you set it up so you’re not giving the IRS more than they need—and not owing more than you want. Just smarter tax planning, tailored to you.