The One Thing Too Many People Get Wrong About Tax Refunds

It's a myth you shouldn't buy into.

Let's face it -- filing taxes isn't exactly a fun way to spend a weekend (or longer, depending on your situation). The upside, though, is getting to see a potentially large refund hit your checking account.

But what if this year's tax refund is shaping up to be smaller than last year's? If so, you're in good company.

For the week ending March 17, the average tax refund came to $2,933. A year prior, it was $3,305. That's a notable difference.

It's easy to see why tax refunds are down this year. In 2021, many tax benefits took effect as part of the American Rescue Plan, the massive stimulus bill that was designed to help the public cope with the pandemic. Those benefits, which included a number of boosted tax credits, translated into larger refunds for 2021 tax returns, which were filed in 2022.

But those pandemic-era benefits didn't carry through into 2022. So this year, as filers submit their 2022 tax returns, they're apt to start noticing smaller refund amounts. That's not necessarily a bad thing, though.

A tax myth worth dispelling

Many people are wired to believe that a larger tax refund is better than a smaller one. But one thing you ought to remember is that a tax refund does not represent free money that the IRS is giving you out of the goodness of its heart.

Rather, a tax refund simply represents money you were entitled to collect earlier on in the year, but didn't. So if you're in line for a smaller tax refund this year, it means you got more of your money in 2022, when you no doubt needed it.

To put it another way, the average tax refund so far this year -- $2,933 -- represents that much income the typical filer did not receive in 2022 but could have. Now, think about last year. Did you struggle with different bills due to inflation? Were you ever forced to carry a credit card balance forward (and rack up some interest in the process) due to not having the money to pay it in full? And would an extra $244 a month have helped you better cope with higher costs and your bills in general?

Chances are, yes. And that's precisely why a large tax refund isn't necessarily something to aim for. All it means is that you denied yourself money upfront and paid more in taxes than you were required to.

How to purposely shrink your refund

If you'd rather start getting more of your money upfront rather than waiting for a larger refund, talk to your employer about adjusting your tax withholding (the amount of tax taken out of each paycheck). Your payroll department should give you an opportunity to make changes to your W-4 form, though it might take a few pay periods to process them. From there, your paychecks might get a little larger, giving you the leeway to spend your money when you need to.

The idea of a giant tax refund may be exciting initially -- until you realize what it represents. So if you want more financial flexibility on a month-to-month basis, consider taking steps to intentionally shrink your next refund -- and collect more of your money as you earn it.