Only 48% of Americans Understand that Large Tax Refunds Aren’t Free Money

When my friend called me recently to complain that she was only getting a $400 tax refund this year, my initial reaction was, “Wow, that’s great.”

My friend was taken aback because she usually gets more like $2,000 from the IRS each filing season. But because she’d earned more interest on her savings last year and also had a small side hustle, she was due a lot less.

The reason I was happy to hear about my friend’s small refund is that I’m a firm believer that tax refunds aren’t a good thing. And I wish more people felt the same.

Why a tax refund isn’t something to celebrate

A lot of people are convinced that it’s best to get as large a tax refund as possible. And a recent survey by the Tax Foundation found that only 48% of respondents understood that tax refunds were nothing to celebrate.

See, when you get a tax refund, you might think that you’re getting free money from the IRS. In reality, though, you’re just getting your money back — not a gift from the government or anything like that.

The reason you’re eligible for a tax refund is simple — you paid too much tax the year before, and now you’re getting your overpayment returned. Think of it as paying for a $16 purchase with a $20 bill and getting $4 handed back because that’s just how the math works out. No one is throwing you free money.

Furthermore, when you wind up with a large tax refund, it means that you gave the government an interest-free loan. Is the IRS going to give you your refund plus interest dating back to last January, when you started withholding too much tax from your paychecks? Nope.

So if you’re someone who typically collects a large tax refund during tax season, know that you aren’t doing your finances any favors. All you’re doing is denying yourself money you could’ve — and should’ve — had access to sooner.

How to avoid a repeat mistake

It’s almost impossible to break even perfectly as far as your taxes go. Even if you do a great job of paying the IRS what you owe during the year, you’re likely to either be eligible for a small refund or owe a small amount of money.

If you commonly find yourself on the receiving end of a large tax refund, talk to your payroll department at work about adjusting your withholding. That should result in larger checks for you every pay period.

And if you’re worried that you’ll end up owing the IRS money after adjusting your withholding, what you can always do is stick the extra money into a savings account of yours and leave it untouched until you’re ready to file your next tax return. Then, if you find that you owe money, you can dip into that account and settle your bill with the IRS.

But that way, you’ll be the one earning interest on that money — not the government. And that’s how it should be.