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Why A Big Tax Refund Could be Bad

April 23, 2015

Though a bigger refund from the IRS feels good, it actually indicates poor financial planning. According to the IRS, more than 99 million individual income tax returns were received and more than $77 million in refunds were issued by mid-March this tax season. The average refund was $2,893.

Unnecessary Transfer

Receiving thousands of dollars may seem like found money in your pocket, but it is not free. The refund money is your income that should have been paid to you throughout the year. If you had received that amount on your paychecks, you could have invested it, used it to pay down debt, or generated interest from a savings account.

Possible Reasons for a Larger Refund

Even though there is no set limit to how much you should receive in a refund, a big refund generally means that you are withholding more than you need to. Some return preparers believe that a refund under $1,000 is ideal. If this is the case, you may want to review changes in your life that may be affecting the withholdings.

Life changes such as marriage, divorce, birth of a child, adoption, and change of job can impact your taxes. If there was a major change in your life that may have impacted your income and/or expenditures, then you should recalculate your withholdings to adjust to the change.

When trying to reduce your refund amount by adjusting your withholding, take care not to pay less than you owe. Tax withholding is an estimate of your tax liability. Ultimately, you may find paying a little extra is preferable to paying too little.


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