You’re Probably Overpaying the IRS by $1,000 or More a Year: Here’s How To Stop
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
A tax refund feels good because it comes in one lump sum, like a sudden windfall. The truth? That was all your money to begin with that you essentially loaned to the IRS. The average refund in 2025 was around $3,000, which means that if you’re getting a refund, you’re likely overpaying the IRS. Christopher Stroup, CFP and owner of Silicon Beach Financial, explained how to stop.
Why People Overpay the IRS
The biggest reasons Americans give the IRS an interest-free loan each year are outdated W-4 forms, missed deductions and unclaimed credits. Stroup pointed out that withholding too much is common for dual-income households and anyone with equity compensation or bonuses. Many also forget to deduct retirement contributions or health savings account (HSA) money, which leads to sending far more to the IRS than necessary.
How Incorrect Withholding Inflates Refunds
A large refund may feel like a bonus, but it’s actually proof that you withheld too much. Then “the IRS holds your money all year without paying interest,” Stroup said. Adjusting your W-4 to reflect dependents, credits and real income fixes this quickly. Running a mid-year projection is a good way to ensure your withholding matches your actual tax liability.
Signs You’re Withholding Too Much
There are simple clues that indicate you’re sending far more to the IRS than necessary, Stroup said: “Oversized refunds, inconsistent paychecks after bonuses and surprisingly low take-home pay.” If you regularly receive a refund of $1,000 or more, you’re likely overpaying. Another sign is needing to update multiple W-4s when juggling side gigs, freelance income or second jobs.
Tax Breaks People Miss Most Often
Every year, Americans leave valuable credits and deductions on the table that could shrink their bills and minimize overpayment. “People commonly miss the saver’s credit, child and dependent care credit, student loan interest deductions and HSA or IRA contributions,” Stroup said.
Renters often overlook state-level benefits, while homeowners miss energy-efficiency credits. “Many also fail to deduct charitable gifts made through payroll or stock donations.”
How To Check If You’re On Track To Overpay
A few simple mid-year checks can reveal whether you’re headed toward a large refund or a surprise tax bill. “Review year-to-date withholding on your paystub and compare it against projected income using a tax estimator,” Stroup urged. Flag gaps between withholding and expected tax liability. “If you receive equity compensation, run a mid-year review as RSUs (restricted stock units) and bonuses can push you into higher brackets without warning.”
Tools To Get Withholding Right
Most Americans rely solely on their employer’s HR portal, but better tools exist. The IRS estimator is the most precise because it accounts for credits, dependents and second jobs, and payroll calculators from major HR platforms also help. “For business owners or anyone with variable income, a full tax projection with a planning-focused advisor provides more accurate results.”
When To Update Your W-4
Life changes often require a fresh W-4, but many people never revisit it. Marriage, kids, promotions, bonuses, equity compensation or side-gig income all affect your tax liability and your withholding.
“If you experience large withholding swings after bonuses or RSU vests, updating mid-year helps smooth out your cash flow,” Stroup said.
Housing-Related Tax Breaks People Forget
Your housing situation may qualify you for tax benefits that meaningfully reduce your liability, Stroup said. He noted that renters often forget state-level credits tied to local housing costs, while homeowners miss deductions for mortgage insurance premiums, energy-efficient upgrades and points paid during refinancing.
“Many also overlook HSA contributions or retirement catch-up opportunities that can meaningfully reduce taxable income.”
Why Side Gig Workers Get Withholding Wrong
Irregular income makes withholding much trickier. Many freelancers overpay just to play it safe, while others underestimate their taxes entirely, risking penalties. “Quarterly reviews help stabilize cash flow and prevent surprise balances each April.”
Just be sure to estimate quarterly tax payments based on “actual year-to-date numbers” instead of “rough guesses,” Stroup said. And don’t forget about paying self-employment tax.
The Quickest Fix To Stop Overpaying
Most people have never updated the W-4 they filled out years ago. Correcting that one document with your actual credits, dependents and income can immediately boost monthly cash flow. “A five-minute adjustment reflecting real credits, dependents and outside income often puts hundreds back into a monthly budget without increasing the chance of owing at tax time,” Stroup said.
Withholding isn’t a “set it and forget it” task. Simple check-ins can keep your tax bill predictable and prevent you from giving the IRS too much of every paycheck.
More From GOBankingRates
