Taxes: Is a Bigger Refund Better?

tax-return-dollar-billsApril 15th is almost here, and that means tax season is coming to an end. According to CNNMoney, the average federal tax refund so far this year has been $2,831. That sounds like a good thing, right?

The problem is, that money didn’t fall out of the sky. In most cases, it came from you, in the form of payroll deductions or quarterly estimated tax payments. So when you get a tax refund, you’re receiving repayment of an interest-free loan that you made to the government.

Loaning Money to Uncle Sam

To be fair, with rates as low as they are these days, your tax refund probably cost you very little in terms of lost interest. The real problem is that you had to wait to get the “loaned” money back from the IRS (or the Indiana Department of Revenue). All other things being equal, wouldn’t you rather have a dollar today instead of a dollar tomorrow?

Some people suggest that a tax refund has some value as a “forced savings account.” They have a point, but a tax refund is a lousy way to save because it doesn’t give you much control over your money.

Smaller Tax Refund, Bigger Paychecks

The bottom line is that a smaller tax refund puts more money in your paycheck because you’re having less withheld. To adjust your tax withholding, ask your employer about submitting a new Form W-4. If you’re unsure about how to fill out the form, the online IRS Withholding Calculator can help.

Self-employed? Since you don’t have taxes deducted from your earnings, you’ll need to adjust your quarterly estimated tax payments if you want to reduce your refund. This can be tricky because self-employed people tend to have variable income. For this reason, among others, I recommend that self-employed folks enlist the services of a Certified Public Accountant (CPA) for help with their tax needs.

Matt Conrad is an Indianapolis bankruptcy attorney and the founder of Conrad Legal LLC, which helps people in Central Indiana get out of debt with Chapter 7 and Chapter 13.

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