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Pros & Cons of Getting a Big Tax Refund

Pros & Cons of Getting a Big Tax Refund

Most people would never consider a big tax return a scam. It's better than paying a huge chunk of your money to the IRS, but some people may have downsides.

Making smart decisions with your money includes paying your taxes strategically. Below is a summary of the cons and pros of getting a big tax refund. Keep these things in mind now to start planning for next year's taxes.


Pros: 

A tax return is extra money

Everyone loves getting a tax return because it looks like the government is giving them free money. People eagerly check the status of their tax returns, waiting for when their bank account will grow larger. The truth is that many people can use the extra cash. According to Bankrate, nearly six in 10 Americans don't have enough savings to cover an unexpected $500 expense.


Paying more taxes forces you to save

Are you the spending type? One of the advantages of paying too much tax each month is that it forces some to save indirectly. If you're the type to benefit from Uncle Sam keeping your money, waiting for a big tax return can be financially sound.


A tax return can work like an interest-free loan.

Some people treat their tax returns like interest-free loans. They use it to put down a deposit or buy an expensive item that would otherwise require a loan. If you don't need the extra cash for an emergency fund or to pay your bills, this is a financially smart use of your money, as you'll save money by avoiding interest. It's also a good strategy if you're not the best at saving money for a big purchase.


Cons

You keep less than your monthly paycheck

Sometimes smart itemization and deductions add up to a heavy tax return. Other times it's because people pay more tax than necessary each month. Some taxpayers do this on purpose; they manage to collect an excess amount if their taxes are higher than expected. If you're not sure what your tax liability will be and want to minimize the possibility of debt in April, this is a good strategy.

For half of the American households living paycheck to paycheck, paying more taxes than necessary each month may not be the best financial decision. This is especially true if you continue to rack up credit card debt or have high-interest unsecured debt.

Reassessing your taxes may reveal that you regularly pay more than you should. Adjusting the deduction is equivalent to getting an immediate pay raise because you earn more of your salary each pay period.


Many people don't save or invest in taxes.

Let's be honest. When people receive a large sum of money from a tax return, a percentage of that money goes to discretionary spending. This is an expense that is unnecessary and can put a budget in the red.

What people should do with the extra money is pay down the debt (starting with the highest interest rate) or invest it so they can grow their assets. In surveys like the one conducted by GOBankingRates, many people say they want to use their tax returns to pay off debt or build savings. However, 32% of respondents did not have an action plan. A great way to make sure your tax return won't go to waste is to request direct deposit into a savings account.


Paying too much is like giving the government an interest-free loan

When you get a refund, the government gives you back the money you overpaid. But until then, the money was in the federal government's bank accounts, not yours. Instead of giving the government an interest-free loan, you can save the extra money and earn interest on it.


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Dennis Jao
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