Tax Policy

Why Getting a Big Tax Refund is Actually a Bad Thing

Are you overpaying?

It’s officially tax season – also known as refund season. It’s the time of year where we pray for a huge tax refund to wash away the sorrows of our Christmas overspending. It’s the time of year where we rejoice or cry depending on the amount of money we get back from the IRS. It’s also comparison season because men and woman alike stop bragging about their hand bags and cars and start bragging about the size of their tax refund.

For those with SRS (Small Refund Syndrome) it’s a time of jealousy because our friends and family members are getting huge tax refunds while the rest of us debate what to do with our $25 refund.

If you are self-conscious about the size of your refund – don’t fret! Having a small refund is actually a good thing. This article will breakdown why having SRS is actually a good thing and why bigger isn’t always better.

It’s the Taxes that Matter – Not the Refund

The biggest misconception when it comes to tax time is the bigger the refund the better the accountant. What taxpayers should actually worry about is the amount of taxes they are paying. If you want a big refund then here’s a helpful tip – have half of your paycheck withheld for taxes and get a massive refund at the end of the year. Of course this makes no sense and I’ll explain why.

The best comparison to filing your taxes is paying for groceries. If you walk up to the counter with $50 worth of groceries and pay with a $100 bill then you’ll receive a ‘refund’ of $50. Another person with the same amount of groceries pays $60 and gets a ‘refund’ of $10. Who is better off? Obviously they walk away with the same amount of groceries and paid the exact same price. You wouldn’t say the first person is better off because they got a $50 ‘refund’ when the net effect was the same.

This is also true for taxpayers filing their tax returns. If taxpayer ‘A’ has tax due of $1,000 but they have $$2,000 in withholding then they’ll receive $1,000 as a refund. Taxpayer ‘B’ has a tax due of $1,000 as well but had $1,010 in withholding. Taxpayer ‘B’ only gets a $10 refund but you wouldn’t say taxpayer ‘A’ is better off because they both paid the same amount of tax.

It’s Your Money and You Need it Now!!

Having a huge refund at the end of the year means you overpaid your taxes all year long. This means you could have had extra money in your paycheck every month for bills, unexpected repairs, or other weekly expenses.

You could have used this money instead of charging those expenses on a credit card. Instead of being broke during the holidays you could have had extra cash to pay for those gifts. It’s your money so why not get more of it during the year?

The IRS is essentially holding your money in a zero interest account. If you gave your financial advisor $5,000 during the year and they made you no money in return you’d be furious. If that’s the case, why give the IRS an interest free loan?

Speak With a Tax Advisor

With the new tax law taking effect it has never been a better time to speak with a tax advisor to see if you have the proper withholding. Making sure you’re not overpaying during the year ensures you have a more accurate budget and prevents you from going into debt to finance your monthly expenses. To see if you’re over-withholding consult with a tax advisor.

This article is for educational purposes only and should not be used as tax, legal, investing or other paid professional advice or services.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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