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 25, 2013 2:00PM
GET RID of refunds all together.Everyone pay 5%.
Jan 25, 2013 1:20PM
Jan 25, 2013 1:18PM
Let's just take over Mexico since their all here anyway and steal their money and gold like they have us for many years....they can keep their fat **** women though.
Jan 25, 2013 1:09PM
OK....let;s not be STUPID HERE!!!   This is ALL 100% Obama's fault.  I'm selling and business bc I and have no idea what that crazy dud eis going to do next...

Breaks my heart, but I'm considering moving...we've gone so corrupt
Jan 25, 2013 1:01PM
why file at all?  ****'em...I can't live with the taxes taken out of my paycheck - just pay them later....Thank you Mr. **** U Mohammed Obama

Jan 25, 2013 12:27PM
When I was in college I would get those large ($2,000+ refunds) thanks to the Hope Credit.  NowI may only get about $400-$600.  I just throw it right into my ROTH.  I suppose I could adjust it to the dollar to not even get that, but $600 is a rather small amount anyways.
Jan 25, 2013 11:57AM
What is wrong with overpaying my taxes? I feel patriotic loaning my government money for them to collect interest for the entire year. Yea, I may be pissed every paycheck, but I know what usually waits for me in Feb or March, 2k plus.
Jan 25, 2013 11:55AM
Right, lets put that saved tax money in a low interest savings account with fees for walking in the door......
Jan 25, 2013 11:43AM
Did the same thing years ago as a young soldier with a wife and three kids. Platoon Sgt had me change my withholdings one year because he said I was wasting money just like these people are saying. That year the government changed some of the tax laws and I ended up owing at tax time, talk about a hardship on the family, it was a disaster. I changed my withholdings back to none ASAP. Most of these financial gurus can't understand what it is like as a young person just starting out with nothing, living paycheck to paycheck trying to avoid payday loans when the car breaks or an emergency happens. They have never been in your situation and can't grasp it. You do what you have got to do at this stage of your life to save something, anything. After I caught up with the bills I used what was left from my big returns each year for some college courses trying to break the cycle I was in. It took some time, hard work, and using the different Army college programs but it was way worth it.
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.
Jan 25, 2013 11:12AM
My husband and I will continue to claim Single 0 on our W-4 to get a refund.  This "refund" is our home improvement money.  Every spring we do a major home improvement project with that money so to me, it is a valid and vital budgeting tool.
Jan 25, 2013 10:51AM
We tried this a couple of years ago. We changed our paperwork at work and we still get a large amount for a refund. We did go conservatively. But my motto was that I'd rather them owe me than me owe them and then have nothing to give them when it came time. We have not been very good with our money (it's hard with 2 people instead of 1... but we have done so much better this year that we are almost out of debt). I'd say we could alter it again after we have paid off debt and have a good savings, but by then we will be self employed and life will be even more complicated. Oh well...
Jan 25, 2013 10:46AM
only the dumb and the poor get refunds
Jan 25, 2013 10:44AM
Well, it's about time someone pointed this out.  YOU ARE NOT SUPPOSED TO GET A REFUND.  You need to make adjustments to get as close to -0- as possible, and hopefully, not have to pay anything out.  SAVE YOUR MONEY IN AN INTEREST-BEARING ACCOUNT!  Don't let the Government use your money all year just to give it back to you WITHOUT interest!  Wake up....
Jan 25, 2013 10:38AM

I might be wrong but I assume they draw some kind of interest or profits from that money while they have it and if so wouldn't not letting them hold it actually increase the deficit ? sounds like a bad idea.


Jan 25, 2013 10:35AM

"Quite getting tax refunds."  This is the worse advise ever.  Yes, if you are perfect at accounting for every penny and want to maximize every sector of your financial world, yes, the article is right. 


If you are like most people and may need a "force saving plan" to pay off bills and credit cards with the refund, then it is a good way to save.  No matter how hard I try to get my card balances to $0 it never happens.  I use my refund to start the year with no debt.  If I got an extra $30 per pay period I would spend it and never know what happens to it. 

Jan 25, 2013 10:31AM
maybe i'm stupid but why the delay in letting people file tax reforms for 2012. the new tax laws were passed in 2013 so why would those changes affect the 2012 tax year?  could someone explain please?
Jan 25, 2013 10:28AM
I love my refund so leave me alone
Jan 25, 2013 10:26AM
I figured this out years ago.  Reduce withholdings, choose cheaper healith insurance plan at work,  put the difference in 401k.  That reduced our AGI, so we got a higher EIC.  Used larger refunds to pay down mortgage.  As expenses were reduced (student loans paid off, mortgage paid off) or income increased, increase 401k again.  We went from 5% wages into 401k to 50% and finally maxed the 401k last year.  Use large refund to fund Roths.
Jan 25, 2013 10:22AM

These articles just aggravate me. "Money" people write this crap and neglect a large portion of population that gets tax credits rather than refunds. There is a box on your filing status form that you can check to be exempt from paying federal tax if you always, and expect to, get it all back in a refund. My income and family status puts me in that category for the past several years, but with credit the government still sends me around $6k every year. Just how they deem that appropriate I have no idea, but if they're going to send it I'm going to spend it. How do you expect me to adjust my withholding and not plan on getting that money to use for bills, repairs and such?

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