Why You Don't Want a Large Tax Refund (2024)

FAQs

Why You Don't Want a Large Tax Refund? ›

Is getting a big tax refund a good thing? No, some financial experts and taxpayers say, because it means you're giving up too much of your paycheck to taxes during the year. If less is taken out for taxes, you'll get a smaller refund but more money in each paycheck for expenses or saving and investing, they argue.

Intermediate Accounting

Your taxable income BEFORE deductions. Why might it be DISADVANTAGEOUS to receive a large refund instead of a smaller one? Receiving a large refund means you were OVERWITHHOLDING from each paycheck, and that's money you could have used throughout the year for other things.

So when you get a big refund, you're just getting your own money back. True, it's sort of a mandatory savings account that pays off once a year, but you're still losing money on the deal. That's because the IRS gets to use your money for most of the year, without paying you any interest.

If you get a big tax refund, you've just allowed the government to use your money interest-free for a year. When the IRS sends you that refund check, they're just giving you your money back. That's why it's called a tax refund. By adjusting your tax withholding, it'll feel like you gave yourself a raise!

Changes to your income last year may play a role in receiving a smaller refund this tax season. Here are some examples: Salary increase: If you got a salary increase last year but neglected to increase your tax withholding, this could lead to a smaller tax refund when you file.

Is getting a big tax refund a good thing? No, some financial experts and taxpayers say, because it means you're giving up too much of your paycheck to taxes during the year. If less is taken out for taxes, you'll get a smaller refund but more money in each paycheck for expenses or saving and investing, they argue.

In most cases, a big refund indicates you aren't taking all of the withholdings and tax deductions you're eligible for. You can fix this by adjusting your tax withholdings with your employer.

Additionally, a refund is not necessarily a trigger for an audit.

The biggest factor in determining a refund amount is how much you've paid in over the course of the year. Are you making an exact comparison? If the person you're thinking of has more dependents, or a different filing status than you, your tax returns will have widely different results.

Do you get a bigger tax refund if you make less money? ›

Key takeaways

You can increase the amount of your tax refund by decreasing your taxable income and taking advantage of tax credits. Working with a financial advisor and tax professional can help you make the most of deductions and credits you're eligible for.

If you receive a refund to which you're not entitled, or for an amount that's more than you expected, don't cash the check. For a direct deposit that was greater than expected, immediately contact the IRS at 800-829-1040 and your bank or financial institution.

Generally, more income means more taxes. Your new total income might be in a higher tax bracket. Your second W-2 could have pushed your total income into a higher tax bracket, making it taxed at a higher marginal rate. Your withholding credits may not have increased enough to cover your taxes from the second job.

If you didn't account for each job across your W-4s, you may not have withheld enough, so your tax refund could be less than expected in 2024. Or, if you had a salary increase in 2023 but didn't update your tax withholding accordingly, you could receive a smaller refund.

If you owe money to a federal or state agency, the federal government may use part or all of your federal tax refund to repay the debt. This is called a tax refund offset. If your tax refund is lower than you calculated, it may be due to a tax refund offset for an unpaid debt such as child support.

A downside of receiving a tax refund is that it indicates you overpaid the government throughout the year, essentially giving them an interest-free loan with your money until you receive the refund.

The biggest factor in determining a refund amount is how much you've paid in over the course of the year. Are you making an exact comparison? If the person you're thinking of has more dependents, or a different filing status than you, your tax returns will have widely different results.

(b) Excessive amount. For purposes of this section, the term “excessive amount” means in the case of any person the amount by which the amount of the claim for refund or credit for any taxable year exceeds the amount of such claim allowable under this title for such taxable year.