As I've mentioned previously, I'm a big believer in aiming for a modest (under $500) tax refund each year. I don't necessarily manage it every year--for instance, J and I got over $900 back for 2012--but I do what I can.
I believe in doing this for several reasons:
1. I don't like the idea of giving Uncle Sam a huge, interest-free loan every year.
2. With judicious money planning, I know that I can either earn a little on the money by saving or investing it throughout the year, or I can put it to other good use throughout the year.
3. Psychologically, we all tend to view tax refunds as "found money," even though it's our own income. That means we'll often spend it in ways we'd never spend a paycheck--on electronics, vacations, or other purchases that might not be entirely necessary.
However, I also recognize that not everyone is going to be like me when it comes to money. For me, having an opportunity to balance my checkbook and transfer money to various high-interest savings accounts is almost as much fun as a trip to Disneyland. (More so, since there's generally no line and no possibility of whiplash). For those non-money nerds out there, I can certainly comprehend why it would be tempting to increase withholding simply to make paying taxes easy and to ensure that underpayment will never be an issue. Also, having a big check from Uncle Sam every spring is a nice little bonus, and for those individuals who have an easier time dealing with big money rather than little money spread out over 52 paychecks, it can also be a better way to be responsible with your money.
So basically, even though I believe in aiming for a modest return, I certainly don't judge those who do the opposite.
However, I will say that I find it disheartening to see people blow their tax refund when they can't really afford to do so. Here's what I'd rather see people do with their big refunds, rather than book a cruise or buy a big-screen TV:
1. Fund your retirment account. Being able to put a big check into retirement gives you an incredible boost--which having a little bit deducted from each paycheck does not.
2. Beef up your emergency fund. They say you should have 3-6 months worth of income set aside for a reason.
3. Pay off debt. Again, the psychological impact of a big payment is worth the disappointment of not being able to blow your refund.
4. Pay for education. Either setting the money aside so that you can eventually go back to school without a loan or putting it in a 529 account for your little one's future education.
5. Give it away. Donating to charity not only does good in the world, but it also really feels good.
6. Buy a nice little something for yourself (emphasis on the little). If you do spend the entire year sticking to your budget and penny-pinching, it is important to treat yourself every once in a while so that you can keep up the frugal habit. The problem is when you start feast-or-famine thinking, which is how many people treat their returns.
J and I have not yet decided what we will do with our refund this year, but I'm thinking about suggesting a payment on my student loan, considering how close I am to paying that bad boy off.
How much did you get back this year, and what do you plan to do with it?