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 10:00PM
i wouldnt give the government the sweat off a monkeys balls, how any middle class person can owe the government is an abomination, we get screwed all year long, yet they want to stick it in a little deeper
I need to find out it how works because there won't be enough of the check left when Obama gets done with it.
Jan 24, 2013 8:36PM
Obama says the government must have more revenues. He might refuse to provide refunds. If you could make it all year without these funds you're not paying your fair share.
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 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 7:19PM
Just because it's in a savings account, does not mean I will not be tempted to spend it.  The argument against tax refunds holds a lot more water when there's more than a measly 0.9% interest paid on savings.  I have never had the discipline to save; the IRS' forced savings program via withholding is the only way I have been able to save.  The tax refund is a vastly underrated tool as a means to acculmulate savings.
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 7:08PM
Getting a refund is sure the heck better than having to owe taxes. So go play on the freeway!
Jan 24, 2013 7:07PM
Oh sure, then you'd have to OWE taxes every tax season. NO THANKS. I'll continue to do what I've been doing and get a refund every year. I figure I'm owed that much with how hard I work. So no thanks for your advice!
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 6:37PM
We don't have withholding and Uncle Sam penalizes you if you underpay.  One year, due to the economic downturn, we paid based on the prior year income, per the estimated tax rules, and got a refund of $13K.  Sunk it immediately into that years Individual 401(k).
Jan 24, 2013 6:17PM
I've worked all of my adult life, practically non stop, and I've never claimed more than three (if that many) exemptions on my W-4.  In addition to the amount that is withheld, I have an extra ten dollars withheld from each paycheck.  I believe that if I pay my fair share of income tax, social security and medicare, I have a right to voice my opinion about our government.  For those of you who claim ten or as many exemptions as possible on the W-4; paying absolutely zilch into our Federal government - SHUT UP!  You have NO RIGHT, to complain about anything going on in the government!  I will say that EIC mostly, is a joke.  It is an "earned income credit" but people like myself who don't claim a lot of exemptions and who make over 35k per year, without children aren't afforded this extra credit.  However, we are the ones paying into it.  I don't believe the lower wage earner, taking four, five, six and more exemptions on their W-4 should be afforded the EIC.  They're not earning it!  But I guess welfare is what it is.
Jan 24, 2013 6:08PM
I stopped gitten em yar before last when I quit wurk.  Wawn't no need fer me to wurk no more.  I wurkd. Dam gobermint give my moni to freeloaders.  I quit. Damn em.
Jan 24, 2013 6:06PM
I get my tax advice from Mike Tyson.
Jan 24, 2013 5:37PM
Formula to reach maximum 401k limit and reduce your overall taxes is to take the limit $17,500 and divide it by your yearly salary.  If you earn $50,000 you should defer 35 percent. If $75,000 defer 23 percent.  It is your money, people.  You earned it.  Don't let the government withhold your pay for their use, not yours.
Jan 24, 2013 5:18PM

Interest free loan to the government....


Extra date with my lady...


High yield self managed stock portfolio...


Steak dinner...


Low interest savings account...




Really the more I get per check the better.

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 4:56PM
one more thing, if I make a mistake on my withholding and don't take enough out, it would kill me by adding another debt with all the christmas bills due at the same time!
Jan 24, 2013 4:52PM
It ALL sounds great and it is "better" for the tax payer BUT with a little bit bigger pay check must people would just spend more on nonsense items i.e. eat out more, spend more shopping by buying un-NEEDED items, etc. By getting a big return has a two fold effect. One, the grovenment earns money on my money while they are holding it, two which keeps the national debt downans two, I can plan to make bigger purchases or plan vacations wihout having to get deeper into debt my self
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.
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