Your Life

Think a large tax refund is a bonus?

Getting a big check from the government might seem like a reason to celebrate. Yet there are good reasons why planning for “break-even” is a better financial move.

There is a widely-held notion that withholding more from your paycheck acts as a savings plan. By not having access to that money throughout the year, you’re not over-spending each month. In reality, you’re losing money in the long run and taking unnecessary risks.

Get the interest you deserve

A refund check means the IRS owes you for taxes you didn’t need to pay. Yet a large refund also means your money (which the IRS is sitting on all year) wasn’t gaining any interest for you. It’s a free loan to the government.

Instead of letting the IRS use your hard-earned income, adjust your withholdings to pay the minimum each month with the goal of breaking-even come tax time. Earn interest on the same amount by placing it into a savings or investment account. You can even set up an automatic deposit to make it easier and “hide” that extra income from yourself. Check out this article explaining the pitfalls of a large return from MSN Money's tax expert.

Planning for the unexpected

Unforeseen events, from disability to losing your job, can mean a change in your income. The amount already withheld from your paycheck may be kept from you, or “held on account” until tax filing season opens up. When you withhold the minimum each month, you’ll have more cash from each paycheck. When you put that cash into a savings account, it’s earning interest and there when you need it.

Protecting your identity

According to an IRS study tax-related identity fraud has tripled in the last year. Criminals are filing false returns using someone else’s identity, and then stealing the refund check. Some taxpayers are not even aware it has happened until they file their real tax return. It can take months or even years to straighten out.

While the IRS proactively fights to protect against refund fraud with increased identity screens, it’s a good idea to do all you can to keep your information safe. It’s also good practice to file your taxes as early as possible and limit the amount you’ll get in the refund by adjusting your withholdings.


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