Get a Tax Refund Every Year? Suze Orman Insists There's Something 'Radically Wrong' With That

A tax refund isn't the windfall you might think it is.

Each year, the majority of people who file taxes wind up getting some amount of money back from the IRS. In 2022, the average tax refund amount came to $3,025 -- not a small amount of money. And if a sum of that nature hit your bank account this year, it may have prompted you to do a little happy dance.

But while it's easy to see why many people would rather get a tax refund than owe the IRS money, the reality is that tax refunds aren't the gift taxpayers think they are. In fact, if you get a tax refund year after year, financial guru Suze Orman insists that there's something "radically wrong" with that situation.

Why tax refunds aren't a good thing

It's easy to look at a tax refund as free money. But it's not free money that the IRS is giving you to be kind. Rather, it's money you're entitled based on your earnings -- money you didn't collect as early as you could've.

If you get a $3,000 tax refund from the IRS, it means that the IRS took $3,000 more of your money than it was entitled to the year before, and now, it's giving that money back. In fact, you can look at a tax refund as a temporary loan you gave the government. 

Here's the problem, though. When you underpay the IRS by a substantial amount, you're penalized for paying too little tax. But when the IRS takes too much of your money, it's not penalized at all. In fact, you're not even entitled to interest on your tax overpayment if the IRS issues your refund within a reasonable time frame.

That's why Orman and other financial experts agree that consistent tax refunds aren't a good thing. Not only should you not be loaning the government money without getting anything in return, but also, you might need that money up front to avoid having to rack up debt to cover your expenses. 

Let's say you got a $3,000 refund this year. That means your paychecks could've been $250 higher every month in 2021. Meanwhile, let's say you had to rack up a credit card balance of $500 at one point last year to cover some higher-than-expected bills. Had you gotten more of your money upfront, you might've managed to pay those bills -- and avoid interest charges in the process.

A change could be in order

If you've been getting large refunds every year, you may want to consider changing your withholding so there's less tax taken out of your paychecks. This is a change your employer's payroll department should be able to process. 

Doing so could result in much lower tax refund, or even no refund at all. In fact, you should be careful with that extra money in your paychecks in case you wind up with a slight underpayment on your hands. But that way, that money is there for you when you need it. And it's fair to say that you probably need it more than the U.S. government does.