As tax season continues, many Americans look forward to a hefty refund. But Suze Orman, financial expert and the best-selling author of “Women and Money,” says getting that check from the government shouldn’t be a reason to rejoice.
“If you’re getting a tax refund, you are making one of the biggest mistakes out there,” she tells CNBC Make It.
That’s because a refund is an indication that you’ve basically given the government an interest-free loan.
Here’s why: If you typically receive a substantial refund, it means that more taxes are taken out of your paychecks than you actually owe. The government uses that money throughout the year and then, when you file your taxes in April, it pays you back the extra amount you contributed.
If you adjust the amount that’s withheld from your income so less is taken out, you’ll get a smaller refund, or no refund at all, but you’ll see more money in each paycheck.
Though getting a refund may feel like a windfall — the average one is around $2,600 — Orman argues that you could put that money could to better use throughout the year. After all, “it’s not as if the government pays you interest on that money,” she says. “You have money that they are holding for you just to get a refund, when you could be getting that extra $100 or $200 a month.”
That money could be going straight into a retirement account, where it could start earning interest, for example, Orman suggests. Or you could pay down your credit card balance or student loan debt and avoid racking up additional interest there.
You could “do all kinds of things with that to create more for yourself,” she says.
For Orman, the bottom line is that getting a tax refund is “the biggest waste of money that you will ever get.”
Adjust your withholding so you’ll get more over the course of the year and less at tax time, she suggests. To do that, you’ll need to review your W-4, which is the form that determines how much income tax is withheld from your pay.
If you’re not sure how much you should be withholding, the IRS calculator can give you an idea.