Smart TaxesSmart Taxes

Quit getting tax refunds

Many Americans depend on tax refunds for savings. But you might be better off adjusting your withholding and opening a savings account.

By MSN Money Partner Jan 24, 2013 1:30PM

This post is by Kay Bell at


 © Getty ImagesLots of folks are grumbling about having to wait to file their taxes. Why? They get refunds.


That's no secret. Every tax filing season, the Internal Revenue Service notes that most taxpayers get refunds.


But the American Tax and Financial Center, a new undertaking by tax software giant TurboTax, has taken a closer look at this refund trend.


A federal tax refund is the largest lump sum of money received in a year by the typical American household, according to the Center. And based on 2011 and 2012 IRS data, it estimates that around $230 billion in federal tax refunds will be issued this year to American taxpayers.


They'll get this money, their money, eventually -- after the IRS finishes updating forms and its computer system to match the tax law changes Congress didn't approve until Jan. 1.

Because of that congressional tardiness, the IRS is processing returns, and issuing refunds, a bit later this year. And that could cause a lot of people a lot of problems.


Tax refunds, says the American Tax and Financial Center, are especially vital for U.S. households who live paycheck-to-paycheck and who depend on a tax refund to help cover the costs of everyday living.


Forty-two percent of early tax filers plan to use their refund to pay down debt and cover the costs of rent, food and utilities, according to the Center's analysis.


Adjust withholding instead


As longtime readers of know, I am not a fan of tax refunds. I think it's better to have your money in hand throughout the year via proper payroll tax withholding.


But I understand that a refund is an easy, forced savings account. And with interest rates on traditional savings accounts and CDs at just fractional percentage points (thanks for nothing, literally, Federal Reserve!), you're not losing any earnings right now by letting Uncle Sam be your banker.


But you are losing access to your refund money because the IRS can't get it to you as quickly as you'd like.


So just think about adjusting your withholding this tax year. That way a bit of your usual refund will show up in each of your 2013 paychecks.


Sure, Congress might finally get its act together and tax filing this time next year may be on schedule. But we are talking about Congress.


If you're afraid you'll just spend that money that you usually get as a refund, there's a way to save yourself from yourself. Open a savings account and have the amount that you're sending to the IRS via payroll withholding directly deposited in your own account instead.


Since it won't show up in your pay, you won't be tempted to spend it. And I have faith that you can leave that savings account alone until you really need to tap it.


More from and MSN Money:


Jan 24, 2013 3:13PM
It is hard to change withholding for this year when I don't know exactly how the tax changes will affect me.
Jan 24, 2013 3:31PM

I intentionaly withhold at the 0 dependent single rate and then file married with my wife and I as dependents just to get a large refund.

If we were to get lets say $25 dollars a week extra on the paycheck it would just get p!ssed away in our day to day lives.

Even if we were to put it in a savings account the intrest doesn't amount to sh!t and the sneaky fees the banks screw you with would make it a loosing game.


Jan 24, 2013 3:30PM

Time worn, but sage advice.

Go one step further:

Use the proceeds from your with-holding change to start or bump-up a 401k!

It's double good... The 401k contributions reduce your AGI (lowers your taxable income).  You might not nail-it first year unless you are tax savvy, but if you use soft-ware or pay a professional it should be a snap.


Next to a small business and home-ownership, the 401k is the best thing going for the 'little guy'...


Do yourself a big favor and look into this.  Take control of your finances, America!


Best of Luck...



Jan 24, 2013 3:59PM

always better to owe the governmant then them owing you.  remember the IOUs from the states when they over spent.  after it is my money not theirs, why let them keep it until they give you a refund. use the money for yourself, invest and save  then you are always ahead of the game. especially this year when they will hold back refunds if you dont get healthcare they want you to have. they wont return you money  but they also dont have a way to collect if you dont owe them



Jan 25, 2013 8:49AM
Too many people pay little in taxes and get huge sums back, I see it in the section 8 housing across from my work, new tv boxes, stereos, furniture boxes outside every tax season. Moms poppin babies for that fat monthly check and big check every tax season because of earned income credit. I am all for the Fair Tax, pay a tax on everything you buy, but no income tax taken from your paycheck, and best of all no refunds
Jan 24, 2013 4:45PM
Unfortunately in the state of  Taxifornia, the closer you get to even on the federal taxes( not owing or getting a refund ) the more you owe the state.

Jan 24, 2013 6:45PM
I always try to get the smallest refund possible. As long as you're accurate on your W-4 it's easy to get close.

I just had my first child a few months back. I immediately opened a college savings plan. The extra tax money I get in my paycheck is going into his college savings plan. So many people are struggling to set aside money to help their children with college, which decreases the chances they'll even go. By putting a small chunk of extra money away now for 18 years, my son will have the vast majority of tuition paid for. This is just one example (of many) of making money work for you.

The problem is that so many people can't see into the future and live only in today. There will come a day when they will need to send their children to college, get their mortgages paid off, retire (unless they want to work the rest of their lives or live on small ss payments), have a down payment for a car, etc. etc. Saving the extra money that can be put into a paycheck by not withholding so much is a fantastic opportunity yet so many people squander it. My sister-in-law goes out and buys TV's, computers, gaming stations, etc. etc. every year with her $6000 refund. Her refund is long gone within a week.

If you have a mortgage, you can shorten the amount of time you're paying interest by upping monthly payments. If you're car is broken down, a sizable down payment can reduce interest paid. If you're going to take out a loan to help your child through college, a little savings now can limit the damage from interest. There is a theme here. This country has one of the smallest savings rates per household in the developed world. Maybe this philosophy is why we are trillions in debt and counting.

Jan 24, 2013 7:10PM
Like one financial adviser said on the radio some years ago when asked a question wether or not bonds were a good ivestment or not? He asked the caller a question. Would you loan money to a cronic gambler? He said no! He then told him thats what happens when you loan the government money when they cannot even balance their own checkbooks. They give & spend money that they do not have, & the american taxpayers keep on giving it to them. That money that they get in returns are interest free money  they use thruout the year & give it back to you with no interest. Imagine 250,000,000 million tax payers doing that. Thats alot of money to use for free with no fee. Must be nice. People do the same getting 401 plans. You wouldnt gamble with your ss check, would you? People do it everyday with their 401 plans. It is nothing more that a tax shelter for the companys. While you pay the tax when you cashout. Hmmmm? Interesting........
Jan 24, 2013 3:32PM
Better yet to under withhold & get an interest free loan from the government. Just be sure you don't owe enough to have to pay extra. This is what I have always done but the puny interest you get now hardly makes it worthwhile.
Jan 24, 2013 10:14PM

You think its bad now just wait until next years when Obamacare takes hold and everyone that cant afford health insurance gets taxed even more.

Plus all the other hidden crap he put into it that he would not tell people until its too late

Jan 24, 2013 5:17PM
Many Americans depend on tax refunds for savings. But you might be better off adjusting your withholding and opening a savings account.


Might?  This is a no-brainer. Poor people receive tax refunds and always stay broke.  Smart, financial people receive little or no refund and see their wealth increase.

Keep the weekly difference and buy stocks that pay dividends.  If you do not have the will power to save money every week for savings or stocks you are a sad, poor individual who I will probably have to pay for when you are old and have $0 savings.


Jan 24, 2013 7:42PM
Am I the only one that thinks that this is because they don't want to give the taxpayer back their money. By doing this and not letting you file you tax's till 1/30/13 then waiting 21 more days minimum to get your money they have just kept it for 7 more weeks that they can earn interest on. Wake up people, this is about them not having the money to send out not anything else. 
Jan 24, 2013 10:03PM

Every year some self appointed money person gives this advice.  Do NOT listen.  Most of us will never notice the few dollar increase changing or deductions would make.  Maybe we'll buy an extra coke.   but $10.00 a week becones $520.00 in a year.  Enough to buy something a little bit nice, start an IRA (make it a Roth), pay a chunk down on the credit card or take your loved one out for a nice evening without putting it on plastic.

Jan 24, 2013 11:48PM
The ideal situation is, of course, to adjust your withholding so you break even; no refund, no taxes owed.  It makes no sense to give the government an interest-free loan while you wait for your refund.  It also makes no sense to see a tax refund as a savings account when it makes no interest.
Jan 24, 2013 8:18PM
It's not the witholding or the refund thats the hassle, it's the "FILING". If I could just pay witholding and not get a refund or have to file in April, that would be perfect. I consider the refund my payment for the angst of compiling and filing 1040's.
Jan 25, 2013 8:51AM

Everyone has their own idea of what to do with their money. Many times the money "experts" are wrong. There is no right or wrong when you decide what to do with your money. It is your choice. You can choose to follow suggestions like this or not. However I disagree with safety nets the taxpayers have to pay. it is your choice and the responsibility is yours as well.


I choose to get a refund. To me it is like free money at this time of year. I have no plan for it. it is money that comes into our hosehold that is not on the budget anywhere. Free money to blow as we wish. We do not miss it through the year because it is not in our pocession. How we use it is decided after we get it. Usually on something fun. People say that is wasting money. Yes it is. My choice.

Jan 24, 2013 4:52PM
I spent most of last Saturday trying to find an accurate tool to tell me what the impact in dollars would be if I changed my allowances from 2 to 3. There was not one to be found at least one that seemed even close to being accurate.
Jan 24, 2013 4:15PM

At least in my state if i have my federal taxes really close then that means that i will have to pay into the state.  My income also fluctuates which makes it even harder to make sure that i am balanced in my taxes.  Also for me getting the tax refund when i do helps me with my finances since that time of year is usually my slow period.

As far as putting more into a 401k, who knows if that is actually going to make any money?  I do have money put into a savings account each month.  it is not a lot but it does add up.

We will see how I come out this year.  I did lower the amount that i am putting in for taxes so i should be closer this year.


Jan 25, 2013 9:22AM

I am always within a couple thousand of owing no big deal I would rather have the money. When you learn to use money instead of money using you then you can really be free. It amazes how many people will spent hours learning the stats of their favorite fantasy team, or know everything about something not really important but have never read a single book about money! The reason wait for it........they are lazy and want other people to do it for them problem is the other guy or gal needs to make a living to so guess you pays? It is not that hard....Save early in life, pay it off each month or do not spent it. STAY OUT OF DEBT. I am not perfect in this I LOVE to spent money the best money spent is that money that helps someone else best return I have ever found. Long term joy.

Just be a little smart and a little not so lazy. Just saying..... 

Jan 25, 2013 11:37AM
If this country went to a flat tax with no deductions there would probably be more revenue coming in and we could almost eliminate the IRS.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.