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This is not tax season but the topic something to think about: is it good to get a large tax refund?

Against a big refund

Let’s examine the reasons a person shouldn’t get a big tax refund:

You are giving an interest-free loan to the government.

You are taking money out of your cash-flow. If you receive a refund, you’ve had extra money withheld from each paycheck. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not.

That money could be invested at a high rate of return. Not only does a tax refund give your money to the government interest-free, it also deprives you of the chance to earn a return on the money.

Loss of purchasing power – by getting no return on your money over the year, you lose purchasing power. In other words, what cost $1,000 a year ago costs about $1,021 today, depending on the inflation rate.

You are not paying less tax. Regardless of whether you owe or get a refund, the tax you pay is the same. Of course, if you owe too much, there is a penalty for underpayment of taxes.

Getting a large refund does not decrease your chances of an audit.

There are many people that will squander their big return.

Another advantage is the money you save, if you choose to automatically deposit it in an account is it in itself is an emergency fund.

For a big tax refund

The big check.

If you want the big check after April 15th, here are a few ideas:

One idea is to have the money that would normally go toward overpaying taxes and put it into a savings account or money market. Have it automatically withdrawn from your paycheck so you do not see it.

Put the money you would give the government into your emergency fund.

Pay down your high interest debt immediately.

Don’t forget that some states gave refunds in the form of an IOU.

If you do not want a tax refund

Adjust the amount of tax withheld from your paycheck so the amount you owe/get is as little as possible. Since each person’s situation is different ask your tax advisor on the amount withheld. If your income is through a W-2 form, all that is required is filing a W-4 form with your employer. You can do this any time of the year.

If you are self-employed, you can calculate the quarterly payments so the total you owe is minimal. Keep the money  in a fixed income account such as money market or money market savings account.