How Tax Refunds Work

How Tax Refunds Work

Millions of people look forward to receiving a tax refund every year.  They usually spend it on furniture, clothing, cars or vacations.  But did you know that getting a tax refund really isn’t a good thing?  Let me explain how tax refunds work and why you don’t want one.

Did you receive a tax refund this year?  And what does that have to do with sustainability and homesteading? 


Especially if you can’t find the money to make your dreams come true!

Many people get a tax refund and then use that money to go shopping to buy furniture and electronics.  Some will even use it to pay off debt.

However, using a tax refund as a form of “forced savings” isn’t the best use of your money! 

But let’s take a look at what’s going on when you are on track to receive a tax refund and why you might want to reconsider your tax withholdings.

it's your money

That is Your Money!

Have you ever gone in to the grocery store to buy a few things, got up to the register and been told, “That comes to $19.30, please”, and then proceed to give the cashier a $50 bill.

But tell her to keep it until next April???? 

Without interest?  Of course you wouldn’t!

How about when you pay your other bills? 

Do you give them more money than you owe and tell them to just hang on to it for a few months?

When you receive a tax refund from the government, you are giving them an “interest free” loan for over a year!! 

What a deal….for them!

In this country, when we are employed, we are required by law to pay several types of “income tax” that come directly out of our checks, per our employer. 

These taxes include federal, state, local and social security. 

How much we pay for these taxes depends upon several things, including marital status and how many dependents we claim, among other things.

When you fill out a W-4 with your employer, you decide how many dependents to claim. 

This number isn’t necessarily going to be the exact number of children you have, for some it will be more and for others it will be less.

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how tax refunds work

However, here’s the secret…

If you are getting a tax refund of more than $100, your withholdings probably need to be re-examined.  Period.

Why shouldn’t you receive the money you’ve earned each and every pay period?  You should!!  Pay Uncle Sam what you owe, but not a penny more!

If you receive a $2,400 refund this year, that’s $200 more that you could have had in your pocket every month of last year!

That money can go to pay down mortgage debt, student loans and credit cards! 

It might just be the money you need to make ends meet every month!  Or to buy that piece of property in the country that you’ve been dreaming of!

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What should you do?

First, check out this tax calculator

If you are on track to receive a refund this year, plug in just a few numbers from your tax return and this calculator will give you an idea of how you might want to change your withholdings.

Next, go have a chat with your HR (Human Resources) person and talk about how to change your withholdings so that you don’t get much of a return. 

People are often afraid to do this, but there’s no reason to be concerned. 

You can change your tax withholdings anytime you want! 

As many times as you want! 

Once again, it’s YOUR salary!  That’s what “Human Resources” is there for!!

The common misconception is that you can’t change your withholdings to any number different than the number of children you have…this is not true.

Again, go talk to your Human Resources person, they should be able to help you calculate the best option for you. 

You should verify your decision with your tax professional as you’re filing your tax return, this is the best time of year to do it.

Finally, people often worry that they might get their numbers wrong and owe money when April 15th comes around.

Let me ask you this….would you rather pay Uncle Sam a little something in April or have him keep (and earn interest on) your refund money for most of the year??

(I am not a tax account or professional financial advisor, I speak from personal experience only.)



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