Most people enjoy getting a large tax refund each year but should that be your goal?

Edrie Pfeiffer
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Edrie Pfeiffer, Bankruptcy & Divorce Attorney

Although getting a large refund is a nice surprise once a year, the ideal situation for most people is to have their refund come as close to $0 as possible.  Getting a large refund likely means you have had too much withheld from your paycheck during the year, and since the IRS only pays back the exact overpayment amount, this essentially means that you’ve given the government an interest-free loan over the course of the year!  If you adjust your allowances, so the appropriate amount is withheld from your paychecks during the year, you’ll have more money during the year, and more flexibility.  You could, for example, put that extra money into an interest-bearing savings account, and you’ll wind up with more than you do by leaving it with the government.

To see what the appropriate withholding amount would be for your situation, you can talk to a tax professional, or try using the IRS’s withholding calculator, which can be found here:,,id=96196,00.html.  To adjust your withholdings, speak with your payroll/HR department about your W-4 form.  The W-4 is the form you use to specify how much you want to be withheld from your paycheck.  On it, you can claim a certain amount of “allowances”, depending on how many dependents you have.  The general rule is the more “allowances” you claim, the less is withheld from your paycheck.  If your HR department is particularly helpful, they may provide you with a “dry run” pay stub, so you can see exactly how much will be withheld per check in different situations.

You can also lose your tax refunds if you owe student loans, back child support, certain debts to the government, or taxes. If you are expecting a large refund, it could come as quite a shock when you receive a letter stating that your refunds have been taken instead of receiving the money you expected.

If you are considering filing for bankruptcy, the number of tax refunds you are receiving will be a consideration in your case. If you file a Chapter 7 bankruptcy, you must protect your tax refund. If you are filing a Chapter 13 bankruptcy, you are normally allowed to keep your refund but you must treat it as income prorated throughout the year. If you receive a large refund each year, this will mean that your bankruptcy schedules will show a higher monthly income than you actually receive.

If you need assistance in protecting your tax refunds while taking care of your debts, contact Hampton Roads Legal Services at 757-276-6555. I will meet with you and advise you on the best way to protect your refunds while becoming debt-free.