For Most Taxpayers, Getting A Big Refund Feels Good

For most taxpayers, getting a big refund feels good. According to the IRS, the average American received a refund of $2,860 in 2021. Awesome! That should cover the summer vacation or make a down payment on a vehicle.

But wait, why you are getting this nice windfall? It’s because you gave the government an interest-free loan the previous year! Your paycheck was also about $250 less per month. If you had put that extra cash in a 401(k) and your company matched the contribution, you could have just doubled your money instead. Add in soaring equity markets, and you could possibly have picked up another 10% or so. On the other hand, if you end up owing money to the IRS at the end of the year you could have actually benefited from an interest-free loan from the government.

Getting it right

To reduce your refund for 2017, contact your employer’s payroll department and reduce your withholding. It can be a little complicated getting the calculations right, but the good news is you can make adjustments throughout the year. If it’s too confusing to ask your HR department for help.

When getting a refund is a good idea

If you feel you aren’t responsible enough to save on your own, then a big refund can be beneficial as forced savings. (This is only true if you don’t spend the refund before you can save it.) If you’re still working, a better idea may be to have your employer deduct that extra amount you have been giving to Uncle Sam every paycheck and have it deposited into a savings account. Once you get 3-6 months of salary put away as an emergency fund, then start adding those monthly contributions to your retirement account.