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Can You Afford to Give Up Almost 6 Weeks of Income Each Year? Many Americans Are Doing So Without Realizing It

By Maurie Backman – Mar 10, 2019 at 8:48AM

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Talk about madness.

Many working Americans have something to celebrate each year during tax season: an IRS refund. Underpaying taxes is quite common, with the majority of filers getting money back from the IRS upon submitting their returns. But while we're wired to regard those refunds as a windfall of sorts, the reality is that they don't represent found money, but rather, delayed compensation.

Any time a tax filer gets a refund, it means that he or she had too much tax withheld from earnings during the year, and as such, is owed that money in return. Where was that money all along? Why, in the hands of the U.S. government, of course. And what do filers who collect refunds get in exchange for essentially lending that money to the government during the year? Absolutely nothing.

A yellow sticky note reading tax refund is tacked to tax form 1040


Compounding the problem is the fact that tax refunds don't tend to be small in nature, and so when working Americans give up enough earnings to warrant those large payouts during tax season, they inevitably compromise their finances in the process. In fact, between 2015 and 2017, the average tax refund amounted to 5.7 weeks of take-home income, according to a new report by the J.P. Morgan Chase Institute.

Let that sink in for a minute. Between 2015 and 2017, the average filer with a refund could've collected the equivalent of almost six weeks' pay during the year, but instead gave up immediate access to that money and waited until the following April (or thereabout) to receive it. It's a highly unsettling notion to contemplate, given that millions of Americans live paycheck to paycheck, lack emergency savings, and are at risk of running up debt the moment an unplanned bill (or, in many cases, an expected bill) falls in their lap. Therefore, if you're in the habit of collecting a tax refund, it's time to rethink that practice -- and start snagging more of your hard-earned money up front.

Get the money that's rightfully yours

The solution to your overly large refund problem could boil down to adjusting your withholding on your W-4. Claiming an extra allowance or two could put more money back into your paychecks so that you're not waiting all year to collect the cash you've earned.

That said, before you rush to make that withholding change, see what this year's tax refund looks like. Tax code changes in 2018 caused the IRS to produce a new set of withholding tables that resulted in higher paychecks for many workers across the board. As such, the aforementioned large refund problem may have essentially resolved itself for you by virtue of those withholding changes. But if you get another large refund this tax season, do something about it. Otherwise, you might find yourself in a scenario where you're forced to rack up debt because you don't have the money to cover expenses up front.

If you're worried that adjusting your withholding will cause you to underpay your taxes and owe the IRS money next year, a good bet is to put the extra cash you receive in your paychecks into a dedicated savings account. If you need to use that money during the year, it's there for you. Otherwise, leave it alone, earn some interest, and then, if need be, dip in to cover next year's tax debt if it turns out you owe the IRS some money. It's a far better bet than giving up many weeks' worth of income and waiting months to access the cash you're entitled to collect all along.

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