The average tax refund hit nearly $3,200 in 2023, according to the IRS. Though a large tax refund may seem like a windfall, financial experts warn it means you may be paying more than you should. By overpaying taxes from each paycheck, you provide the IRS "an interest-free loan."
Yahoo Finance's Rebecca Chen breaks down why it's smarter to adjust your tax withholding and keep more money upfront rather than wait for a refund.
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Editor's note: This article was written by Angel Smith
Video Transcript
AKIKO FUJITA: Well, the latest IRS data has shown that the average tax refund from last year was roughly $3,200, a number that has been going up year over year. Experts are pointing out that increasing refunds may not be a great thing for Americans. Let's bring in Yahoo Finance's Rebecca Chen to give us the details. Rebecca, explain to us.
REBECCA CHEN: Hi, Akiko. Yes. So, everybody loves a big tax refund, and it almost feels like a reward for doing your taxes. And sometimes it even feels like a little extra paycheck when you do your taxes. But experts are saying that we have to change our mentality about how tax refunds are because we have to remind ourselves that it is our money to begin with.
And when you have too much withholding with the government, it is essentially like giving them a interest-free loan throughout the year. The nature of tax refund is that it's really an overpayment that we made during the year, so the government is giving them back. And this is quite a big deal because we're living in a very high-interest, high-debt environment.
And if you are one of the people who are seeing your credit card balances go up, for example, the average household now seeing $7,000 of credit card balance, and they are paying about 21% of APR on their card. So if you're really seeing some of your high-consuming debt on your end, it really doesn't make sense for you to overwithhold with the government while paying such high interest. You can really, throughout the year, lower your withholding and use that money to pay off your high interest rate credit card debts and you'll be better off financially.
AKIKO FUJITA: So what should taxpayers be doing in this situation then? I mean, as they look at maybe not this year, but the next year, so that refund isn't so high at the end of the year.
REBECCA CHEN: I think the first thing to really focus on is take a look-- if you're somebody who consistently gets high tax refunds year after year, really think about if you're withholding too much. That is the first step, and recognizing that that may not be such a good thing. And the second thing is to really reconsider about how much you're holding.
Most people don't know that you can change your withholding throughout the year. It's a fairly simple process. All you have to do is reach out to your HR, ask for the W withholding form, change the number that you want to put in, and it should be reflected within your next paycheck.
So it's a quick and simple process for taxpayers to know. But at the end of the day, or at the end of the day, just remember that this money is yours and you want to put it where it will be the best and best bang for your buck. And that could be in a high savings yield account or that can be paying off the debt, but that is definitely not with the IRS.
