The Not-So-Happy Crossroads of Tax Refunds

Americans are required to file a tax return by the 15th of April in the year following the tax year.

big refunds and tax withholdingEmployers withhold Federal, State, and Local taxes (where applicable) to help workers pay their annual tax liability.

Most self-employed entrepreneurs don’t have employers withholding from their paychecks so they are asked to pay quarterly estimates.

The goal of withholding taxes is to put money aside incrementally throughout the year so we don’t have to come with the entire sum due all at once.

However, there is no simple way to estimate how much we should withhold. This is due to a number of reasons:

  • Tax credits
  • Tax deductions
  • Tax exemptions
  • Change in career or pay rate
  • Change in family structure (marriage, divorce, children, etc)
  • Special situations like energy efficient purchases and debt forgiveness

There are hundreds of situations that have to be taken into consideration when filling a tax return. Many can not be predicted what the correct amount should be when setting up the appropriate withholding from their paycheck.

Getting it right

It is nearly impossible to accurately estimate your tax liability 12 months in advance of tax day (April 15th). While it is better to get a small refund than to owe taxes, there are a number of concerns when a large refund is expected.

Some taxpayers do qualify for tax credits that allow them to pay nothing into the system (or receive it all back). However, the majority of tax refunds are unnecessary – and can lead to goals being delayed.

Coach Connections has put together a one-page resource with links to help you more accurately estimate your tax liability. (See the bottom of the page)

An interest-free loan to the government

A refund is simply this: Individuals sending more money to the government than they have to and the overage is returned in the form of a tax refund.

While that money is sitting in government coffers, you are not able to use it for investing, debt repayment, car repairs or the grocery bill. It is an interest-free loan to the government.

Example: You have a car payment with an interest rate of 3 percent or credit card at 18.99 percent, yet you are receiving a $1,200 tax refund. Would your finances be improved by bringing home an additional $100 a month and use it to pay down the higher-interest debt?

It is our recommendation that you be intentional with tax withholdings to prevent getting a large refund and, instead, use the money throughout the year to reach your financial goals.

Will I be penalized if I under-withhold?

Generally, you will not have to pay a penalty if:

  • The remaining balance owed is less than $1,000
  • You did not have a tax liability for the previous tax year
  • The total of your withholding and estimated tax payments was at least as much as the previous year’s tax liability
  • The tax balance due on your 2014 return is no more than 10% of your total 2014 tax, and you paid all required estimated tax payments on time

Note from Coach Steve: These are general rules that could change at any time. Please consult with a professional for any situations that apply to you.

The not-so-happy crossroads of tax refunds and identity theft

Identity theft has been on the rise for many years. Last year, an influx of fraudulent tax returns were filed and your tax refund could be sent to somebody else. It takes many, many months for the problem to be sorted out and your refund returned to you.

This is yet another reason why we recommend you follow these three steps:

  • Estimate your tax liability before the year begins
  • Adjust your withholdings
  • Re-assess your situation every quarter
  • Consult with a Financial Wellness Coach, CPA, or tax professional for help

Free Resource Guide

Enter your name and email to download this free one-page resource guide. Included are links and simple directions for changing your tax withholding.

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About The Author

Steve Stewart

Coach Steve has been helping everyday Americans pay attention, not interest, since 2007 after he and his wife paid off $15k in consumer debt and, using the principles he teaches, they paid off their house in 2015. You will find him using his passion and messaging gifts to create financial education content through speaking, blogging and coaching all over the United States. You can reach him by completing a contact form at