What’s Wrong With a Big Tax Refund?

First, let’s be clear, a tax refund is not “free money” from the government. A tax refund is actually the government’s way of returning the extra money that you paid them during the year. Essentially you lent the government extra money throughout the year via your payroll taxes. But it gets worse.

When you lend the government this money, they return it dollar-for-dollar without paying you any interest. If you landed a $3,000 tax refund this year, it means you’ve given the government a $3,000 interest-free loan!

Finally, consider the other ways you could have used these funds during the year. The extra cash in your paycheck could mean having some breathing room in your budget. If things are extra-tight now, that missing money could have helped from going into more debt. Or, maybe you would have put that money toward your vacation or emergency savings.

How do I know if my tax refund is too large?

The average tax refund for the 2021 filing year was about $3,000. If your refund is close to this amount, or it exceeds that, it’s likely too large. Make sure you take steps toward lowering your refund amount for future tax years.

However, under some circumstances, some may actually be better off with a big refund. For those who are unlikely to save the extra dollars throughout the year and would quickly spend it, getting a lump sum as a tax refund once a year may lead to better money choices like saving a big portion, or all of that money.

How do I lower my tax refund next year?

If you’re a salaried worker, ask your employer for a new W-4 form. Check your withholding amount, and see how you can adjust it to have less money withheld each month.

Use this guide to learn about why a large tax refund may not be in your best interests, and how to change it going forward.