There are conflicting opinions on whether one should plan to receive a tax refund, instead of owing nothing or more in income tax. However, as with any financial or tax planning decisions, what is right for you depends on your preference, as well as your personal financial and tax profile. Let's review some of the factors that should be considered.

How to Choose Your Withholding Amount
The amount of income tax that you have withheld during the year, depends on the amount of personal allowances that you claim when you complete your form W-4P: Withholding Certificate for Pension or Annuity Payments that you provide to your payor (employer etc.) You can choose to have no income tax withheld, despite your allowances and you can choose to have a withholding tax in addition to the allowance based amount withheld. Form W-4P should be provided to you by your payor at the time you are required to make your withholding election. It can also be found on the IRS' website.

See: Filing Your First Tax Return

When to Plan for a Tax Refund
Electing to have more than you will owe in income tax withheld, will ensure that you receive a tax refund of the excess amount. Planning to get such a tax refund makes sense if you need the lump-sum payment for reasons which include buying a big-ticket item. Of course, this would be practical only if you have poor savings habits. Let's consider the following example:

John wants to take his wife on a vacation for a few days next year. He estimates that it will cost about $5,000. He wants to pay cash for the vacation, so as not to incur any debt related charges and/or interest. John knows from past experience that he is not good at saving, as he usually finds an excuse to use the savings for unnecessary items. Based on the instructions from his accountant, John completed his Form W-4P to ensure that his tax refund amount would be about $5,000. John will use the amount to pay for the vacation package when he gets the lump-sum refund after he files his tax return. (For more, read 3 Common Tax Questions Answered.)

When a Refund is Not a Good Idea
The following are examples of when planning for a tax refund might be a bad financial move:

You Have Good Savings Habits
If you have good saving habits, it may be wise to add the amount to an interest bearing account over the year, instead of having it paid to the IRS where it will bear no interest. Further, if you are eligible to make contributions to a retirement account such as a 401(k) or an IRA, doing so can reduce the amount of income tax that you would owe and allow your savings to grow on a tax-deferred basis.

You Have an Outstanding Interest Bearing Debt
If have an outstanding balance on a debt that accrues interest, it makes better financial sense to use available income to pay down that debt than to have the IRS "hold" the amount for you until you file your tax return.

You Need to Increase Your Emergency Fund
If you need to add amounts to your emergency fund, doing so from each paycheck helps to make sure it is available, if needed, during the year. While a tax refund can also be added to the fund, such a payment may be too late if the money need for the fund arises before you would be eligible to receive your refund.

Your withholding is not an all-or-nothing option. You can choose to have a smaller amount targeted for your tax refund, if you want to use both options.

The Bottom Line
If the only way you can save to pay for big ticket items is to have the amount automatically withheld from your paycheck and held where it is not available to you, planning for a tax refund may be a good idea. Otherwise, it is better to have the amount added to your savings account each pay period. Be sure to discuss the matter with your tax professional, as you could be assessed penalties for underpayment of income by the IRS, if the amount withheld is less than it should be. (For more help with your taxes, read The Ultimate Tax-Time Checklist.)

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