How Your Big Tax Refund Could Actually Cost You Money

US currency in Uncle Sam's hat for taxes

(Image credit: Getty Images)

Many people rejoice each year when they receive their tax refund, but high refund amounts could mean that you overpaid your taxes throughout the year. And if that’s the case, you’ve essentially lent the government money, completely interest-free.

While no one wants a high-income tax bill, owing the IRS just a little could put more money in your pocket. Here’s how much richer you could be if you kept your money throughout the year instead of receiving it back as a tax refund.

IRS tax refund

According to the most recent IRS data, the average tax refund is $3,182 this month. That is a good chunk of change and is likely due, at least in part, to refunds that include the child tax credit (CTC).

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Middle-class families who include other credits (including the CTC) on step 3 of their W-4 will likely have less federal income tax withheld from their paychecks. Of course, this could result in a lower tax refund when it’s time to file, but that is not necessarily a bad thing. With some adjustments to withholdings, some taxpayers could have pocketed just over $265 per month instead of receiving $3,182 all at once.

[Note: Projected earnings amounts are approximate and do not account for inflation.]

Saving for the future

If you had stashed away that $265 each month instead of waiting until tax time for your refund, you could have hundreds more in the bank. (That's assuming you deposited the money into a high-yield savings account with a 5.5% interest rate.) And even though savings rates are expected to fall, receiving a big tax refund in 2024 could cost you money next year as well.

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Row 0 - Cell 0	Deposit $265 per month	Deposit $3,182 per year	Difference
End of Year 1 (5.5%)	$3,261	$3,182	$79
End of Year 2 (4.6%)	$6,662	$6,514	$148
End of Year 3 (2.5%)	$10,047	$9,861	$186

Invest extra cash

If pocketing an additional $186 over three years isn’t enough to convince you that bigger tax refunds aren’t always better, perhaps pocketing an additional $4,637.69 will. Here is how much more money you could pocket over the years if you invest $265 each month rather than $3,182 per year, assuming a conservative 6% annual rate of return.

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Row 0 - Cell 0	Invest $265 monthly	Invest $3,182 annually	Difference
Year 5	$18,413.73	$17,937.23	$486.50
Year 10	$43,055.46	$41,941.29	$1,114.17
Year 15	$76,031.65	$74,064.14	$1,967.51
Year 20	$120,161.24	$117,051.75	$3,109.49
Year 25	$179,216.57	$174,578.88	$4,637.69

Income tax savings

Providing the government with an interest-free loan is not ideal, but it is worse to give away your hard-earned money. Missing out on often overlooked tax credits and deductions, such as the mortgage interest tax deduction and deduction for student loan interest, can result in the IRS keeping more of your money.

And don’t forget about ways to reduce your taxable income throughout the year. For example, record-high 2024 HSA contribution limits mean eligible taxpayers could reduce their taxable income by up to $8,300 this year. And IRA and 401(k) contribution limits are higher for 2024 than they were last year, too.

Just make sure you don’t exceed contribution limits for tax-advantaged or tax-deferred accounts. If you do, you could lose money instead of saving it. And if you do adjust your tax withholdings to receive a smaller tax refund next year, make sure you can pay the IRS (if you have a tax bill) on time because there are hefty penalties for paying late.

Because every tax situation is different, it’s a good idea to consult with a tax professional when determining how to keep more of your money year-round and during tax filing season.

Katelyn has more than 6 years of experience working in tax and finance. While she specialized in tax content while working at Kiplinger from 2023 to 2024, Katelyn has also written for digital publications on topics including insurance, retirement, and financial planning and had financial advice commissioned by national print publications. She believes knowledge is the key to success and enjoys providing content that educates and informs.