The Color of Money | That tax refund could cost you


It’s the largest lump sum lots of people receive, according to the American Tax and Financial Center at TurboTax, the tax-software company.

Typically, you pay your federal taxes by having a portion withheld from your pay. If too much is withheld, you get a refund. But guess what? To get that lump sum, you lent your money to the government with no interest.


“Many people say that they can’t find a way to consistently save other than to short themselves through their payroll withholding,” said Gail Cunningham, spokeswoman for the foundation. “That is indeed forced saving in the truest sense of the word.”

Many intentionally get a refund because they don’t feel they are disciplined enough to save on their own. And if the alternative is that you won’t save, then do what works for you. At least you’r e putting that refund to good use when you get it.

But consider this: Your forced savings plan might be costing more than you realize.

The average income-tax refund is just under $3,000, which works out to about $250 a month. Here’s an illustration Cunningham came up with to show the difference an extra $250 per month can make:

Let’s say you have a credit-card balance of $5,000 with an APR of 14 percent. Your minimum monthly payment is 2.5 percent of the balance, or $125. If you make no further charges, and no fees are added to the balance, it will take you 55 months of making a consistent payment of $125 to pay off the debt. In that amount of time, you will have paid a total of $6,774 on that $5,000 debt, meaning $1,774 went to interest.

Using the credit-card calculator at that shows the “true cost of paying the minimum,” it will take you 213 months to get rid of your debt if you make only the minimum required payment. In that time, you will pay $4,063 in interest. Even if you plan on using the lump-sum refund to pay down debt, you’re still accumulating interest while you wait for your money from the IRS.

But what if you adjust your W-4 withholding so you don’t get a refund? The W-4 has a worksheet to help you figure out how many personal allowances to take, based on what tax deductions or credits you expect to claim. You also can use the IRS online withholding calculator at

Using the same example, you could add to the steady $125 credit-card payment the extra $250, for a total monthly payment on the credit-card debt of $375.


“Same debt, same APR, but a very different outcome, all achieved by using your own money each month instead of once per year,” Cunningham points out.

Michelle Singletary writes for the Washington Post Writers Group.