Why Getting a Tax Refund Can Be a Good Thing

Many financial experts advise taxpayers to avoid getting a big tax refund. They make the valid point that it’s silly to let the government use your money over the year for free and that you should have access to that money.

But in reality, for many Americans, the tax refund is an essential part of their financial lives, and there are good reasons to continue getting a refund.

Expert advice

Most financial-planning experts say you should have less money withheld from your paycheck to avoid getting a big income tax refund every spring. They say tax refunds aren’t gifts: They mean you overpaid Uncle Sam, and you are loaning the government money, interest free. Instead, they say, you should pay just enough taxes throughout the year to avoid a refund, and you could have used that money to invest or pay off debt.

All of those financial experts are absolutely right, technically — just like all of the other experts in parenting, health, dieting and the countless other areas in which we are supposed to be doing right but can’t always manage. If you’re the kind of person who can keep a whole bag of Reese’s Peanut Butter Cups in the snack drawer without finishing them all in one sitting in front of “Game of Thrones,” their advice may be perfect for you. And if you are a disciplined person with lots of self-control, that’s great.

But what if you’re like the rest of us and don’t have quite so much willpower? Temptation and risk have a lot to do with the pros and cons of getting a tax refund. Most Americans don’t create and follow a budget — we are just winging it. But if you don’t have a plan for how you are going to use the extra money in your paycheck, as a result of adjusting withholdings to avoid getting a yearly tax refund, you’ll probably blow it on shopping, going out to dinner or the many other things that we blithely spend our money on.

How refunds help

For many of us, without a plan — or the ability to stick to the plan — it’s smart to let the government hold our money for the year and receive a lump-sum refund at the end. Tax refunds can help taxpayers in key ways, including:


Over the years, our family has used our tax refunds for trips, home repairs, down payments for cars, summer college tuition, a moped, medical bills and lots of other things. Having that lump sum come in every year was a godsend, especially when we were young and money was tight. As a 20-something mom, I wasn’t organized enough to plan our finances just right. Getting a refund served as a forced saving mechanism that helped us out with big expenses come springtime.


Financial experts agree that everyone should have some money in an emergency fund. Most recommend saving three to six months’ worth of expenses in an accessible, liquid account to pay for unexpected events. If you are living paycheck-to-paycheck, it’s hard to put any extra money in such a fund. Fortunately, your lump-sum tax refund can fund that account.


If you withhold too little tax in a year, you could have to pay an underpayment penalty. Most taxpayers avoid this penalty if their total tax bill after withholding is less than $1,000 or if they paid at least 90% of the tax due for the current year or 100% of the tax amount they owed the prior year, whichever is smaller. But how many of us check how we’re doing on our tax payments in the middle of the year? This is impractical for many people.

Other smart moves

Of course, as the experts note, there are good ways to use the extra money from adjusting your withholdings if you know you can be disciplined about it.

In our low-interest-rate environment, money in liquid savings such as savings accounts, money market accounts or certificates of deposit doesn’t make much for you. If you invest the extra money in the stock market instead, you could see much better returns.

You could also use the extra funds to pay down your high-interest debt like credit card debt. This is a great move, since credit card debt is expensive. If you can commit to using the extra money in your paycheck to pay it down, you will be ahead of the game. But if you skip a month here and there, the plan falls apart.

The final word? If you are organized enough to do the no-tax-refund thing right — using the money to pay down debt or investing it — more power to you. If not, don’t worry too much about changing your withholding. But, whether it’s jump-starting your emergency fund or making a big purchase, do make smart decisions about how you’ll use your lump-sum refund.

Original Source: https://www.nerdwallet.com/blog/taxes/getting-tax-refund-can-good-thing/