Tax Day Countdown: Experts Say Your Goal Should Not Be Getting a Refund
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Jordan Rosenfeld
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Molly Sullivan
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The only “reward” at the end of the tax filing process for many is the hope of a nice big check back from the IRS in the form of a tax refund. The bigger, the better, right? Not exactly.
While a tax refund is certainly better than a tax bill, there are some good reasons why you should reconsider hoping for a refund this tax season. Experts explained why your goal when filing your returns should be to keep tax refunds as small as possible, and why that’s not as bad as it sounds.
Change Your Refund Mindset This Filing Season
When it comes time to file, if you look forward to a big tax refund each year, you’re not alone, according to Steven Sarrel, CPA and partner with Raines & Fischer, LLP. “Society has ingrained the idea of a tax refund as a celebratory moment, framing it as a financial windfall,” he said.
Consumers in the United States are also bombarded with ads asking what you’ll do with your refund and corporations not-so-subtly pushing you to view a refund as a chance to splurge. However, your federal tax return, if you do get one, would better serve you by putting it away in an emergency savings account or toward your retirement plans.
However, there’s a problem with this mindset of paying your taxes to then just pay for things, Sarrel said. “This social construct reinforces the idea that a tax refund is a bonus or reward, rather than what it truly is: Your own money being returned to you because you overpaid in taxes throughout the year, allowing the government to hold onto your money interest-free all year.”
Reject Forced Savings When Filling Out Your Tax Forms
It’s easy to fall into what Sarrel calls this “scarcity mindset,” which leads people to prioritize the immediate gratification of receiving a lump sum over the long-term benefits of managing their income more effectively. Your income in tax returns, and how you’ve filed your taxes in general, can either lead to a surplus or deficit calendar year.
“While the refund feels like a moment of financial relief, it’s often just masking deeper issues in how money is managed,” he said.
You can look at it as a forced savings mechanism, but instead of you reaping the benefit in an account of your choosing, the government acts as the savings account, and it comes with no interest or financial growth. Simply put, don’t be your own tax liability when filling out a form W-2, deciding on tax exemptions or racing against the tax extension deadline.
“This approach keeps people in a reactive financial position rather than a proactive one, relying on external forces like tax refunds to feel financially stable,” Sarrel said.
View Refunds as Lost Opportunity
Instead of celebrating a large refund, view it as a sign that you’ve missed out on leveraging your income effectively when filing your taxes on your own, through tax software or with a CPA, Sarrel said. “That money could have been reducing high-interest debt, earning compound interest in an investment or increasing your monthly cash flow.”
The good news is, there’s no time like the present to start doing this.
Focus On Financial Empowerment
Keeping your money in your paycheck throughout the year gives you control, Sarrel explained, because it allows you to manage your cash flow, prepare for unexpected expenses and make strategic decisions about your finances.
“It’s a mindset shift from relying on external forces to being in charge of your own financial future.”
Change Your Withholding
If you regularly get large refunds or owe a lot, the first thing you need to do is adjust your tax withholding with your employer, according to Jay Zigmont, CFP and founder of Childfree Wealth®.
Withholding is how you tell the IRS or your state tax board how much you want to take out of your check each pay period. For example, he said, if you got a $1,200 refund last year and get paid twice a month, you can have your employer take out $50 less each paycheck. It will mean you have $50 more each paycheck in your pocket.
“If you use your refund essentially as a savings account, just have the extra $50 direct deposited to a savings account that you have control over and get interest from,” Zigmont said.
Take a Proactive Approach
In lieu of loaning away your money, Sarrel recommended that you “plan your finances proactively.” Some suggestions for what to do with your money instead of letting the government hold onto it include the following (several of which offer tax-advantaged savings):
- Pay down high-interest debt: High-interest debt, like student loans or credit card balances, can snowball quickly.
- Contribute to a Roth IRA: Investing in a Roth IRA builds tax-free income for retirement.
- Add to a 529 education plan: A 529 account grows tax-free when used for education expenses.
- Make an extra mortgage payment: Paying extra toward your mortgage principal reduces interest over the life of the loan.
- Invest in the S&P 500: Investing in the market offers long-term growth opportunities.
- Build an emergency fund: Set aside funds for unexpected expenses to avoid relying on credit.
- Upgrade home energy efficiency: Investing in energy-saving upgrades lowers utility bills and may qualify for tax credits.
With a slight shift in attitude and strategy, you can look forward to a smaller refund but better control over your money year-round.
Caitlyn Moorhead contributed to the reporting for this article.
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