Is Your Tax Refund Too Large?
A large refund can feel like a windfall, but it may also mean you gave the government more of your money than necessary throughout the year.
Tax season is here, and if you are expecting a big refund, you may feel like you hit the jackpot. Before planning how to spend that money, however, it is worth asking an important question: Is my tax refund too large?
A refund is not free money from the government. In most cases, it is money you already earned but overpaid in taxes during the year. Let’s look at what a large refund may mean, the possible drawbacks and how you can better manage your money throughout the year.
What Is Wrong With a Big Tax Refund?
A large refund is not automatically a bad thing. Some people like receiving a lump sum and use it for savings, debt reduction or a major purchase. However, consistently receiving a very large refund can have some disadvantages.
Less Money in Each Paycheck
Instead of keeping more of your income throughout the year, you allow the government to hold it until your tax return is processed.
Missed Earning Opportunities
That money could be deposited into a savings account, money market account, certificate or retirement account, where it may have an opportunity to grow.
Greater Monthly Budget Pressure
Having more money available in each paycheck may help cover everyday expenses, build emergency savings or reduce reliance on credit cards and loans.
Refund or More Money Each Month?
Consider a hypothetical refund of $3,600. That amount is equivalent to approximately $300 per month.
| Receiving a Large Refund | Adjusting Your Withholding |
|---|---|
| Receive approximately $3,600 after filing | Keep approximately $300 more each month |
| Access the money once per year | Use or save the money throughout the year |
| The government holds the overpayment | You control the money as you earn it |
Your actual tax situation will depend on your income, filing status, credits, deductions and other circumstances. The goal is not necessarily to eliminate your refund or create a tax bill. It is to choose a withholding amount that works well for your household.
How Do I Know Whether My Refund Is Too Large?
There is no single refund amount that is too large for everyone. Instead, consider your refund in relation to your income and monthly budget.
- Divide your refund by 12. This shows approximately how much more money you might have had available each month.
- Review your monthly cash flow. Consider whether that money could have helped you build savings, pay bills or reduce high-interest debt sooner.
- Think about your saving habits. Some people prefer a large refund because it functions as a forced-savings strategy. If that method works for you, receiving a refund may still fit your financial plan.
How to Adjust Your Federal Tax Withholding
Employees can review their federal income tax withholding and, if appropriate, submit an updated Form W-4 to their employer.
- Use the IRS Tax Withholding Estimator. The estimator can help you determine whether your current withholding may need to be adjusted.
- Complete a new Form W-4 if necessary. Follow the estimator results and your employer’s process for updating your withholding.
- Review your withholding after major changes. A new job, marriage, divorce, a new child, additional income or other life changes may affect your tax situation. If your family or financial situation changes—such as getting married, having a child, or taking a new job—you may want to update your Form W-4 to ensure the correct amount of tax is being withheld from each paycheck.
- Ask a qualified tax professional for help. Consider professional guidance when your income or tax situation is complex.
Ways to Make Your Money Work for You
Build Emergency Savings
Regular contributions can help you prepare for unexpected repairs, medical bills and other expenses.
Earn More on Your Balance
A money market account can provide convenient access to your money while offering the opportunity to earn interest.
Save for the Future
Depending on your goals and eligibility, an IRA or certificate may help you build long-term savings.
Already Received a Large Refund?
You can still make the most of it. Before spending the entire amount, consider using part of your refund to:
- Build or replenish your emergency fund.
- Pay down high-interest debt.
- Save for an upcoming expense or financial goal.
- Deposit funds into an interest-earning account.
- Make an eligible contribution toward retirement.
Make Your Money Work for You
Whether you are depositing this year’s refund or setting aside more from each paycheck, AGCU offers personal banking options to help you save with purpose.
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