The Downsides of Getting a Large Tax Refund

Great news—your tax return is filed! But apparently, you’re due for a large refund. For most people, getting this type of news is better than hearing that you owe money. However, there are a handful of hang-ups that you might not be aware of at first glance.

 

What’s the Problem with a Large Tax Refund?

In the past, you might have looked at a tax refund as some “gift” money. After all, instead of cutting a check to the IRS, they ended up paying you. The problem with this line of thinking, though, is that there could have been no less than four other scenarios for your money that would have been more productive for you financially. 

 

1. You could have put that money toward something else. 

Remember: When you receive a tax refund, what that really means is that you gave the IRS a sort of “interest-free” loan. That was essentially your money to begin with, but instead of using it for yourself, you let the IRS hold onto it for months. Not fun, right?

Although interest rates have remained low, you could have been applying those funds to your own savings accounts or other investments. Or—if you had known that you were over-paying on your taxes, maybe you would have gone ahead and bought that new home upgrade, put that money toward your family’s vacation savings, or some other purchase that you were holding off on.

 

2. You could have paid down on your credit cards or other debt.

Perhaps less exciting, you could have put that extra money toward some outstanding debts. Credit card interest is expensive and stressful to manage. By lowering your withholdings during the next tax year, you’ll be in a better position to avoid the same mistake.

 

3. You could have funded another tax-savings account.

Leaving money with the IRS basically means that you didn’t have access to it for other important investments—for potentially an entire year! What about putting money toward retirement? Or adding those extra dollars to your Health Savings Account? Because your HSA contributions are made pre-tax, this can be a really smart way to lower your tax bill. (Not to mention, you’ll have already set aside some funds if a new medical expense pops up.)

 

4. You could have put yourself at risk of identity theft.

Despite everyone’s best efforts, tax refunds are still subject to identity theft. And the longer you’re delayed in receiving that money back, the greater the risk that some criminal will claim your own tax refund. Once you’ve realized that your refund has gotten tied up, you could be looking at some major headaches.

Resolving these problems is definitely possible. But the process can be tedious and quickly feel overwhelming. Getting a local accountant can help you navigate the process. Better yet, consider making the switch to a new CPA firm for the upcoming year. You might be able to avoid the problems with a large tax refund altogether!

 

If you’ve got a big tax refund on the horizon, consider the other possibilities for where that money could have gone. Working with a tax planner or a team of tax professionals can help you avoid those hurdles. You deserve to keep what you’ve earned in your own accounts. By lowing your tax responsibility from month to month, you’ll hopefully be able to find that sweet spot between not owing too much—and not expecting a large refund.