Tax Refund Featured

The Interest Free Loan You Give the Government Every Year

Every year about 40 Million Americans wait in giddy anticipation for their end-of-year bonus, their income tax refunds.  You might say to yourself, “I’m going to treat myself this year by purchasing something I really want!” But didn’t you do that last year? At this time of year car advertisers start pushing their Tax Season Sales or even, Refund Sales. You could walk away with an unplanned, rapidly depreciating asset… today!

But why do people get so excited about their refunds? Is it because they struggle during the year and finally feel that they can put some money in their pockets? To replicate the feeling of getting a refund try this:

Step 1. Take out a $20.00 bill.

Step 2. Hide it under a book.

Step 3. Forget about the money.

Step 4. Find the money.

Sure you’re excited that you and your money are back together again but nothing has been gained. You might say that nothing was lost either and now you have more money than you anticipated! However, something was lost. You lost the opportunity that having your money, ALL of your money, provides you throughout the year.

By getting a refund you’re essentially saying that you can’t trust yourself with your money, you’d rather someone hold it for you to keep yourself from spending it frivolously. If that’s the case,  you may have a bigger problem to deal with; check out the Valuist article on 15 Money Mistakes.

And the federal government only pays you interest if your refund is paid late. Thus they retain the opportunity to loan, spend or otherwise use your money (and make more money with it) while giving you nothing in return but a psychological sleight of hand.

Personally, I would much rather pay my tax bill at the end of the year than get my own money returned to me like a child’s allowance. In fact, after doing this year after year I find that when I do have to pay it is incredibly easy because I was able to save up and invest more of my money throughout the year. Don’t be average, adjust your withholding and use your money when you need it throughout the year!

The Interest Free Loan You Give the Government Every Year

How to Adjust Your Withholding

To adjust your withholding all you have to do is fill out a new W-4 with your employer. Each exemption you claim will place more money back into your pocket during each pay period. I’ve found that if you fill in your W-4 honestly you will likely end up about even at the end of the year. If you take too many liberties on your W-4 you will end up with a high tax bill and perhaps even a tax liability, as outlined in our 5 Common Tax Traps and How to Avoid Them article.

If you are self-employed or had a tax bill of over $1,000.00, you are required to manually withhold for yourself and make estimated tax payments throughout the year. There are a lot of issues surrounding estimated tax payments but in brief you must pay either 100% of what your tax bill was in the previous year or 90% of what you expect to owe for this year.

The easiest way to make estimated tax payments is to take you prior year tax bill and divide it by four  and pay your estimated taxes each quarter. For full instructions and worksheets to figure your estimated tax, please see Form 1040ES.

Exceptions to this Strategy

If you are truly unable to save money throughout the year because you can’t keep yourself from spending, a tax refund might be the only time of the year you save any money. In this scenario, it may be best to maximize your refund (while working on your money management skills). If you want to maximize your refund it’s easy just claim “0” on form W-4 and the IRS will withhold the the maximum amount for you.

Do you prefer a bigger refund or more money throughout the year?


  1. I know a lot of people don’t like “loaning” money to the government each year this way, but I personally don’t have an issue with it. This year we owed money on our taxes for the first time and it SUCKED. I’d much rather receive a refund than a bill come tax time. The key is to not have a gigantic refund each year; that’s a sign your withholdings are out of whack and you’re depriving yourself of money throughout the year.

    1. Thanks Mrs. Picky Pincher, I agree that the trick is to balance your refund and your monthly withholding, and no one likes a bill at the end of the month. Maybe an important part of the process is doing some significant tax planning each year to try to hit that break-even point. Thanks for reading!

  2. I never realized that there were other options when it came to withholding and refunds. In years past I had filed with a 0 and got really excited about that big check after I filed my taxes. Two years ago I had changed my W-4 and was happy to have more money in my pocket each month. And bonus, last year I still got a refund. Now it may have been less than before but it felt like a win win situation to me. Overall, I think this is a good point to bring to your readers. Your money should work for you over the year, save it or invest it and gain the interest. Why should your money work for the government?

    1. Thanks for commenting (and marrying me!). I guess if you sincerely believe the government spends your money better than you would invest in, then there’s not much harm.

  3. AGREED!
    Put simply, if you have a larger withholding on your W4’s, you allow the government to be making money off of *your* money before they give it back to you. I’m not making millions, so even if I wanted to be making money off my money (e.g. stocks, bonds) it wouldn’t be much. But still.
    Just don’t fall into the hazard of not preparing for your inevitable taxes due!

    1. I totally agree with you Matt. And tax bills (and refunds) are usually small when you adjust your withholding to the break-even point.

  4. Jake,

    Some really good articles on your site here. While I personally do the more exemption thing so the government doesn’t receive an interest free loan, there could be another way to look at it. Most people in my experience just aren’t very sophisticated with finance or savings. With not claiming enough exemptions, and the government taking more each month providing the individual with a yearly refund, this could be looked at as a forced savings account. You get back money you most likely would have spent month to month. Since most people don’t take the time to investigate investment options, the additional monthly money most people receive likely goes into a bank savings account earning 0.01 percent interest. So, let’s say you get an additional $50 per month due to claiming more exemptions, and it goes into the bank at 0.01 percent accrual. That works out to be essentially pennies. You are paying the government essentially nothing to save money for you. Just some food for thought!!!! One article I’d like to see is the importance in establishing a Roth IRA particularly with younger people in their 20’s and 30’s. This is the one gift uncle SAM gives us!! Perhaps you have done this one already and i missed it!


    1. Thanks for the comment Uncle Jim,

      I agree that the forced savings is a great route for people who wouldn’t be saving the money and investing anyways; however, I’m trying to challenge the “can’t save” perspective. A lot of intelligent people claim they “can’t save” but it often equates to “not motivated enough to save.” Even if the saving interest rates are low, if people were motivated to save they could use that money to build up emergency funds or down payments on property. I think that when people get a large refund they are also highly likely to spend it in one shot. I covered Roth and Traditional IRAs in an article called, 15 Money Mistakes but they probably deserve a dedicated article. I would also like to cover options trading and I think you’d be a great source of information on that topic!

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