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Big Tax Refunds Are Really Bad

I’ve been spending time at Money.Stackexchange as a moderator and top poster. Recently I ran into a bit of pushback on what I thought was an obvious question.
Why does my tax refund need to be as close to zero dollars as possible? Now, of course, it doesn’t have to be anything, but over the years, I’ve written about how to use the W4 to adjust your withholdings to get your refund down to a reasonable number. I maintain that if nothing else, you are lending the government money that could otherwise be used better by you.

Let’s look at two facts that motivate my approach.

This is from the IRS and references data from last year, 2014 returns. I then search for average credit card balance and find


This is where I make an assumption. It’s that those people who owe debt on their cards, at an average of 16% or higher, are among the 83% who are getting these refunds. Remember your Venn diagrams from high school? Do you think most of the 83% getting refunds also owe money on high interest cards?

Another thought, a factoid that has made the rounds many times in the last few years. According to a report by the Brookings Institute, half of US households would have trouble raising $2000 inside of 30 days for an emergency. In this case, it’s not a matter of a better return in the bank, I know rates are near zero right now, nor is it the fact that you should pay off that high interest debt. It’s that half of us don’t have a sufficient emergency fund to handle even a $2000 emergency.

With all this said, the Stack Exchange discussion led me to the Huffington Post article Big Tax Refunds Really Are Good. The author, Mark Steber, is the Chief Tax Officer at Jackson Hewitt Tax Service. One might dismiss Mark’s position as the refund is in his company’s best interest. But, why would that be? What would it take for a few marketing gurus to change their rhetoric from “we’ll get you the biggest tax refund” to “we’ll get you the lowest tax liability possible.” Let me summarize Mark’s 8 reasons and offer my own counter points to each –

  1. Getting a $3000 check (the average return) is never a bad thing. (Yes, it’s awful. Why lend the government or anyone your money at zero interest?)
  2. 75% of us get refunds year after year, can we all be wrong? (Well, it’s over 80%, but yes, I believe that financial illiteracy is rampant, why would it surprise you to find the majority doing the wrong thing?)
  3. Interest rates at sub 1%. (Indeed, we each have our own opportunity cost. It’s disingenuous to focus on the missed back interest, how about the fact that 1 in 4 employees did not deposit enough to their 401(k) to get a company match. The average left on the table was $1336 according to Financial Engines. A match is an instant 50-100% return, that’s what’s lost.)
  4. Saving money is tough, this is used as a savings account. (I get that. Is Mark suggesting that someone who is not disciplined enough to save on their own, will suddenly be responsible with this lump sum they get in April?)
  5. Some portion of people are getting refundable tax refunds such as EITC. (This is true. Some people pay no tax but get money back do to the Earned Income Tax Credit among other credits. And of course, this is not in their control, they are not paying this money in, they have no choice. This point is a red herring, little else)
  6. Of the three alternatives: owing taxes, landing right on zero or near it, or getting a big refund, you figure out which one is best. (I have figured it out. I’ll make the best use of my money, and can plan ahead. So long as I don’t pay a penalty, I’ve planned well.)
  7. Getting money back is certainly more palatable than owing. (Mark was running low on ideas, this is a rehash of #6. No new point made here.)
  8. You earned the money. It is your money. Get and enjoy the money. (Agreed! Over my working life, I got my money every paycheck, and didn’t have to wait to get it back. I’d say it’s your money, don’t let it go.)

What is my motivation here? Only to bring to light the financial nonsense that’s offered under the guise of sage advise. The problem with this discussion is that the audience can be anyone. I focus on a broad audience, not just the top few.  Mark’s dismissal of the lost opportunity cost, focusing on the low current rates, implies that he ignores all the other scenarios I presented. If such a thing were possible I’d find everyone who is not getting their company match, and explaining to them they could double their money instead of lending it out interest free. Next, I’d sit with those who are paying 18% or more and not paying their cards off in full. It goes on from there. Why does Mark dismiss the real cost that most of us face? The top 10%ers don’t need to worry about $3K tied up, but they are also more likely to have their finances in order.

Now, are you still so sure a refund is a great thing?

  • maplemale February 22, 2016, 11:11 am

    Delayed refunds is something else to consider. In 2010 we were owed a large refund on our taxes (more than $10k). This was due to a few key factors: We started a business and had a higher than normal deduction. We sold an asset at a huge loss and we had a kid with complications and met the medical deduction threshold. Also, at that time we were one of the many who thought: Big Refunds are awesome!

    That spring we were a bit strapped for money as we were trying to purchase our first home in a new city. We were short a few thousand on a down payment. But we filed our taxes in Jan and we had a 60 day closing date for March. Surely our tax refund would be back by then?!

    Due to a glitch with many thousands of filings which happened only if you filed yearly (that’s what you get for trying to help out Uncle Sam!), we didn’t get our refund till Sept of that year. Think the government compensated us for that? Oh eventually they would have paid interest. But it was a complete joke. In the end we spent thousands extra. This has been a risk multiple times since with looming government shutdowns and other issues which has caused delays for many people. That is YOUR money, yet Uncle Sam has no sense of urgency when it comes to getting it to you and you have no recourse or ability to sue the federal government. The penalties you are entitled to are a complete joke. No sane institution would lend money in this situation and neither should any citizen!

  • Sandy Smith April 13, 2016, 12:20 pm

    If you’re one of the lucky Americans getting money back this year let me ask you a question, how are you going to spend your tax refund? My clients (I’m a Financial Planner) usually tell me they’re going to use it to take a vacation or start/finish renovations on their home……

  • Joe April 14, 2016, 4:58 am

    Hi Sandy! In my case, I actually have a refund this year. We are in retirement mode, and in 2015 we took money from my wife’s 401(k). My wife wasn’t yet 59-1/2 so this was the method for the last couple years to avoid penalty, but it came with mandatory 20% withholding.
    The refund we just got simply means less need to withdraw in our 2016 tax year. Nothing fancy, it just goes to the regular account to pay the next bills that come due. I know that many people use it like the old fashioned Christmas club, but in my opinion, that are just playing a small mind trick, at the expense of the better use of their money. These are (mostly) the same people who owe money at 18%, right?

  • Jonny Pean June 15, 2016, 11:41 am

    I would like to spend my tax refund on further investments in stocks- as simple as that.

  • Sukanya June 30, 2016, 1:03 am

    I agree with your counter argument to point 4…”Saving money is tough, this is used as a savings account. (I get that. Is Mark suggesting that someone who is not disciplined enough to save on their own, will suddenly be responsible with this lump sum they get in April?)” I really do not think so…

  • Warren Myers July 26, 2016, 9:06 am

    I’ve gotten large tax returns the last couple years (and will again this year, I expect) due to adopting.

    However, my wife and I don’t *plan* on them (normally) – we expect a modest amount back (generally ~$1500 from the feds, the state is a whole other matter (they’re *never* even close to right for us)), and always put whatever comes back on an outstanding debt (student loan, car, house, etc).

    And a nice dinner – gotta have a little fun with your money 😉

    But I hate getting back a large amount, too – because it means I could have done something more useful with it (like pay extra on my student loan) all year.

  • Erik December 30, 2016, 11:47 am


    To your point #1, what are your thoughts on trying to pay as little tax as possible during the year and have to “pay-in” at the end of the year? This thought is a result of point #6.


  • Joe December 30, 2016, 12:37 pm

    In my opinion, arranging your taxes to your best benefit should be the goal. Back-loading withholdings (this is what it sounds like you wish to do, pay closer to year-end) can make sense if you are making wise decisions. People have an emotional response to money. Somehow, owing, even $100, at tax time, feels ‘bad’ to them. My own response is the opposite, the large refund makes me sick. I don’t know if writing a check for your full tax bill in December will run afoul of the rules, but right now, it’s exactly how I pay my taxes. Through withholding from our retirement savings withdrawals. No tax held until the last request in December.

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