4 Ways To Minimize Your Tax Refund and Save Money Next Year
Written by
Kerra Bolton
Edited by
Amber Barkley
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Many Americans look forward to receiving a tax refund, but a large one often means they’ve given the government an interest-free loan all year.
Instead, taxpayers can adjust their financial strategy to keep more of their money in each paycheck — without risking a big tax bill the following spring.
From adjusting withholdings to making accurate estimated payments, here are four smart ways to minimize your tax refund and hold on to more of your income throughout the year.
Withhold Just Enough
Taxpayers can use the IRS Tax Withholding Estimator to ensure that the right amount is withheld from their paychecks.
“Most people fill out their W-4 once and never touch it again,” said Carlos Ruiz, founder and principal advisor at Pivot Wealth Advisors. “But that’s a mistake. Adjusting it to reflect your real life — mortgage interest, student loans or charitable donations — can shrink your refund and boost your take-home pay.”
Individuals who consistently receive large refunds may want to update their withholdings to avoid overpaying throughout the year.
“If you are getting a $10,000 refund, it basically means you are over withholding by over $800 per month,” said Ashley Morgan, a debt and bankruptcy lawyer. “If your income is fairly consistent, then you could adjust your W-4 with your employer to take out less money each pay period to prevent getting a huge refund.”
Morgan also noted that a significant life change could warrant a withholding adjustment.
“For example, if you get a large raise or promotion, then you could be under withholding,” Morgan said. “Similarly, if you work a gig job or get a second job, even for a few months, it can noticeably change your tax balances.”
Understand Your Tax Return
Morgan emphasized the importance of understanding your tax refund, since it reveals how much you’ve paid the IRS during the year.
“At the end of the day, even if you use a preparer, you are responsible for what your tax return says,” Morgan said. “If you are getting a refund, you should understand why.”
For example, if your refund is due to over withholding, you can adjust for the following year. But if your refund stems from a credit — like the Child Tax Credit — and your child is turning 18, that benefit may no longer apply.
“Similarly, if your large refund is due to a one-time situation, like electrical vehicle credits or significant health care expenses from an illness, then adjusting withholding does not make sense,” Morgan said.
Maximize Pre-Tax Contributions
While many recognize the benefits of tax-advantaged accounts, they don’t always incorporate them into their withholding strategy.
“Use pre-tax contributions to your advantage,” Ruiz said. “Increasing 401(k), HSA or FSA contributions lowers taxable income, meaning less gets withheld without the risk of a surprise tax bill.”
Make Accurate Payments
Accurate estimated tax payments help avoid underpayment penalties and year-end surprises.
Morgan often advises her clients to pay more frequently than the law requires.
“While the law requires quarterly estimated taxes, it doesn’t prohibit more frequent payments,” Morgan said. “If you are monitoring your income and expenses monthly, you are more likely to notice income tending up or down and can adjust accordingly. By making estimated tax payments monthly, you are better able to limit overpaying and underpaying.”
Ruiz added that business owners and retirees can better manage refunds by making the right payments at the right time.
“Business owners can win the tax refund game by making accurate estimated tax payments instead of blindly overpaying,” he said. “Similarly, retirees can minimize their tax refund by withholding taxes directly from their Social Security or IRA withdrawals.”
“The goal isn’t to get zero back — that’s a risky game,” Ruiz said. “A small refund is usually the sweet spot. It’s enough to cover surprises, but not so much that you’ve been loaning the IRS your hard-earned money.”
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