If you’re like most people, chances are good you’re awaiting a refund from the IRS valued at several thousand dollars.
While it may feel nice to get a big check in the mail after you file your taxes, the reality is that getting a big tax refund isn’t actually a very good idea at all.
Here are a few key reasons why that’s the case — as well as a simple step you can take to make sure that you don’t end up making the same mistake by overpaying the IRS again in 2022.
There’s an opportunity cost to loaning the IRS money
The biggest reason you don’t want a large refund from the IRS is because the money that you’ll end up getting back is cash that you paid in over the course of the year that you didn’t actually owe.
By giving this money to the IRS, you weren’t able to do anything else with it. Sure, you eventually get it returned to you. But in the meantime, your money has been inaccessible for months. In fact, excess tax you overpaid in January 2021 may not get back to you until April or May 2022 if you wait to file your tax return until the deadline — well over a year later.
During the time that the IRS was holding your money, you couldn’t use it to buy stock, which may have earned you some pretty generous returns over the course of the past year. You couldn’t put the money toward reducing your debt, which would have saved you on interest charges. And you couldn’t use it to do other things, such as making a down payment on a home that could’ve helped you begin building equity.
There’s no benefit to you to giving the IRS an interest-free loan, and you should consider the costs associated with tying up thousands of dollars of your money until the IRS gets around to sending it back to you.
Your overpaid tax funds aren’t available when you need them
There’s also another problem with overpaying your taxes: The money is tied up, and you can’t access it if you need it during the year.
Say you’d already paid more than $1,000 in extra taxes to the IRS by July when you suddenly faced a surprise expense that was going to cost you over $800. The IRS isn’t going to send you a midyear refund, even if you need the money right away, so you’ll be stuck without the cash that could have helped you cover your unexpected costs.
You could potentially end up in debt or having to make big budget cuts elsewhere that it wouldn’t have been necessary to make if you’d held onto your own money instead of sending the IRS bonus cash.
How to avoid getting a tax refund for the 2022 tax year
The good news is, there’s no reason to overpay your taxes each year. You can avoid this by adjusting the amount your employer withholds from your paychecks or by scaling down the amount of estimated taxes that you send to the IRS if you’re self-employed.
The IRS tax withholding estimator can help you determine the right amount to have withheld. You don’t want to underpay your taxes, as this can result in penalties, but it’s definitely worth making an adjustment if you’re getting thousands back, as there’s simply no reason you should miss out on access to that money all year long.
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