Large Refund: Educate me

[ariahsmum]

So after trying to adjust our exemptions correctly so we would come out even at tax time, I actually have a substantial return (3K).  I know this is not ideal, as I could have made interest on it over the 2012 tax year.  My questions are:

1) there is a tax refund thread on this board (albeit dated 2012).  It seems many of you get large refunds- was this unavoidable?  Planned?  Hoped for?  If so, why not have your money throughout the year and pay down debt or avoid the need to use credit, or even gain interest in savings?  I meet so many people IRL who act like getting a return is free money, or winning the lottery.  It is your money!

2) How can I avoid this in 2013.  3K comes out to about $115 per pay check, which we could really use!  I think part of it was that we own a rental house and took a loss there.  Is this type of thing predictable for 2013?

3) Should we still try to adjust our w/holding if we are hoping to sell the house eventually this year?

Looking forward to the replies!

[JollyGG]

Here is the IRS withholding calculator - http://www.irs.gov/Individuals/IRS-Withholding-Calculator.

We also get about 3k back. However, we've had several job changes over the last several years and haven't always been sure how the new job would effect our taxes and haven't wanted to pay in. I'm out of a job in June, then hopefully back to work the next August, so we probably still won't change my husbands witholdings.

Honestly, as low as savings interest rates are right now. I don't find that it really matters if I didn't earn interest on that money.

[ariahsmum]

I know interest is so very low that the amount will be small on 3K.  However, I do have a lot of debt at higher rates and would have loved to have paid that down rather than get a lump sum at return time.  

I appreciate the link to the calculator- didn't know that existed!  Unfortunately, the link is down and has been since December.  I wonder when it will be back in working order.

[mamarhu]

Another common reason for a big refund is the earned income credit (and other credits) - so it wasn't that we overpaid. I agree I would rather the IRS didn't act as a savings account , and would try to prepay less if I were in your position. But I would be SO disappointed if I didn't get a refund each year!
 

[TiredX2]

If you are going to be in the same tax situation this year as last, you can just adjust your nubmer of deductions you take on your W-4.  This will not work if this is a credit from the Earned Income Credit (you can only go down to $0 taxes paid this way by declaring yourself exempt).  If you are paying federal taxes, though, you can claim more and more deductions until it gets to the correct level for you.  Many people claim more deductions on their W-4 and *still* end up with a refund because of their particular situation.

[ariahsmum]

Our family does not qualify for EIC.  

All I have to do is stop thinking/dreaming about all the ways I could spend it (clothes for dd, trip to Boston or NYC, night away with DH, travel fund for Rwanda, new flower garden, finish a room in the basement) and get it into my debt payoff stream.  Seems harsh to use it all for debt and none of it for fun.

[htcmom]

We have a large family and a small income so we don't pay any federal taxes during the year and we get a huge refund.

[KatherineNaomi]

Originally Posted by htcmom 

We have a large family and a small income so we don't pay any federal taxes during the year and we get a huge refund.

Same here. I think they only took out $145 in federal taxes and we get back almost $8,000 between federal and state.

[AfricanQueen99]

Is any part of your income a bonus paid by an employer?  I ask because my husband receives a salaried paycheck with bonuses in June and December.  At the December bonus all employees are encouraged to speak with the HR guy (it's a small firm, only one person in HR) and he will recommend how much to take our for taxes so the federal amount is around $0.  He's usually spot on with federal within a couple hundred dollars - and that balances out with state.  But this system works because that's our only income - no rentals or anything like that.

[alittlesandy]

Frankly, I would rather the IRS act as a savings proxy for me, regardless of what the financial gurus say. Before I adjusted my withholding I used to pay a little every year at tax time (some years came close to breaking even). I feel like I did not notice or benefit from the extra money in my paycheck. When I adjusted my withholding, we felt the pinch for a few checks, then quickly adjusted and now we don't miss the money. However, the refund comes at an essential time and I use a lump some of it to pay off Christmas, maintain the car, then sock the rest into savings.

Also, I cannot get my withholding just right, so it's either pay or get money back, and I'd rather get money back. Finally, the majority of our refund (as I'm sure is the case with many people here) is the child tax credit.

[sunflower.mama]

Just so you know, plenty of people can get large refunds without paying a lot in. So the tax refund is a windfall from the federal government for some of us.  We have a minimal amount withheld, but because of our hefty deductions, (mortgage interest, state income tax) 3K for 3 kids child care credit and dependent care credit, we get a lot back.  We have about $1500 withheld, owe about $1500 in taxes, yet generally get a refund over $3000.  I view what is withheld as pretty close to what we owe, regardless of the fact that we wind up getting money back.  On any given year the tax laws could change, so I don't want to be stuck with a tax bill.

[sunflower.mama]

We use the refund for summer camps, so it works out well for our family to receive it when we do in a lump sum.  If tax laws did change and we received less, it would be annoying but not critical to our budget.

[bmcneal]

We use our refund for bigger expenses, that we couldn't afford throughout the year. The first refund I got after I left XH, I got a new (to me) car. Last year, I traded in my vehicle for a smaller, cheaper, more fuel efficient car. This year, nothing that elaborate, we're going to use it to take the kids camping for a week during DF's only time off during the year, and get some stuff we will still need for the baby. Other than that, paying ahead on some set bills, stock up our pantry, and some other essentials that we've been squeaking by without.

[Carson]

I think it is passive savings for some. Article I read yesterday said the average refund per household is about 2,600 which is a pretty significant amount compared to household income of $50k.

We are getting an inappropriately large refund of $5k. I went part time which qualified us for the child tax credit, and ds2 was born so we are getting his added exemption. The refund is just paying back our savings acct though, for DS birth and dh having surgery, whee. . I am waiting for that IRS calculator to be available too, as my preliminary tax calculation shows a similar refund in cy13. Like a pp said though, it is easier to be more disciplined or deliberate with a refund vs. monthly adjustment. So I am trying to think where that money should go before getting it each month...

[honeybee80]

I'm starting to rethink this whole withholding thing too.  I think that if I had less withheld every month, I would be more deliberate with where the extra money in my paychecks went.  I really would like to pay down my student loan.  The past few years, I've just been getting these pretty large refunds and they aren't really spent in the best way that they could be.  My dad is doing my taxes and he's going to check out my withholding and see how much changing my exemptions would affect my monthly take home.  I tend to use my refunds for things I don't really need and a lot of it ends up being spent impulsively with the mindset that "I have this big amount of money, so spending xxx on xxx isn't that big of a deal."  My refunds end up disappearing REALLY quickly usually.  This year I'm proud of myself for not pre-spending all of it and having the intention to put it all into savings :)

[Carson]

Here is the calculator I used before. It's not yet updated for 2013, but its really useful to calculate how adjusting your with holdings impact your take home.

http://www.paycheckcity.com/calculator/w4assistant.html?execution=e1s2

[EmsMom]

i get a large refund because of the earned income tax credit and some credits for higher education expenses.  Big refund and I didn't even have any taxes withheld.  My income has increased starting this year, though. 
 

[3timesamom]

We haven't filed yet this year, in the past we have gotten child tax credit's and EIC. We can't get that paid out to us throughout the year.

[ariahsmum]

I totally understand how some of you get a big refund and can't avoid it.  I suppose I will change my w/holding again this year to see if we can avoid a return and utilize the funds better during the tax year.

Still not disappointed to be putting a chunk into the HELOC though that I had not planned on!

[sunflower.mama]

These threads always make me a tad nervous, because I worry that someone who really needs an extra $150 in instantly spendable cash a month might be very adversely impacted by a change in tax laws that suddenly increases their income tax.  The "fiscal cliff" almost eliminated the child tax credit.  That would have increased people's average tax bill by $1000 per child.