If You’re Expecting a Tax Refund of $2,000 or More, Here’s What You’re Doing Wrong
For millions of taxpayers, April showers down cash as much as it does rain thanks to the big, fat refund checks that people across the country look forward to receiving each year.
And in 2022, there’s a whole lot to look forward to.
A new study from GOBankingRates revealed that more than one in four people — 28%, to be exact — expect to receive a refund of $2,000 or more. With gas prices at record highs and inflation forcing just about everyone to dig deeper for just about everything, that’s a welcome chunk of change, for sure.
But perhaps it shouldn’t be so welcome.
Historically, Americans hate paying taxes, yet they love the result of overpaying — and that’s exactly what a refund is. That big April windfall is the IRS paying you back for money that it never asked to borrow — and the reason you gave that inadvertent loan is that your employer withheld too much money from your paycheck on your behalf last year.
Here’s how to fix it so you can keep more of what’s yours when you need it throughout the year from here on out.
Pay as You Go, but Don’t Overpay
The IRS requires you to pay your income taxes little by little throughout the year as you earn income. If you’re self-employed, it’s up to you to estimate your taxes and make quarterly payments.
But if you have a job and collect a paycheck, your employer does this for you by withholding a portion of your check each pay period to remit to the IRS on your behalf. You have a say in how much your employer withholds; and, while you don’t want to underpay — which will result in a tax bill and perhaps fines and penalties — overpaying is no good, either.
If you’re expecting a refund of $2,000, that’s $2,000 that wasn’t growing in your savings, retirement or investment accounts all year long. With the Bureau of Labor Statistics (BLS) citing the median wage in the U.S. as $22 an hour, the worker in the middle of the pack would have to work for more than 90 hours to gather such a sum — only to have the IRS siphon it off, use it to pay its own bills throughout the year, and then pay it back the following year without any interest or even a thank you.
Derail the IRS’s Gravy Train
If you’re like the 28% of the study’s respondents who anticipate a refund of $2,000 or more, you shouldn’t be grateful or excited. You should be wondering how to stop the IRS from taking so much extra money out of your check in the future.
The first step is to use the IRS’s own Tax Withholding Estimator tool, which will help you find that Goldilocks sweet spot between shortchanging the IRS and giving the agency an interest-free loan.
Start by gathering all of your pertinent documents, including pay stubs for you and your spouse, your most recent tax return and information about any other income you earn. You don’t need to worry about inputting personal data, and nothing you enter will be saved, but remember: The tool is only as accurate as the information you enter.
When you finish, the tool will estimate your federal tax withholding and show you how your take-home pay, refund and taxes due are affected by your withholding amount. Then, you can choose an estimated withholding that brings your refund as close to a zero as possible.
By adjusting your employer withholdings, you’re not denying yourself a $2,000 refund, you’re denying the IRS a $2,000 interest-free loan. To do that, you’ll have to take what you learned from the Tax Withholding Estimator tool and apply it to Form W-4, which your employer uses to determine how much to pull from your check every pay period.
If you haven’t filled one out in a while, the old numbered allowances format that you remember is a thing of the past.
“A couple of years ago, the IRS changed its W-4 form to try to have a more accurate withholding from individuals’ wages,” said Arthur Rosatti of Ashley F. Morgan Law, PC, who is licensed to practice in front of the IRS. “If someone has filled out a new form, they are more likely to not receive a larger refund unless they have credits to claim or have a lot of itemized deductions to claim. If someone is still using an old form, they may be over withholding, which will lead to a higher refund.”
The IRS recommends filling one out every year just to make sure your withholdings are accurate; and, although no one likes to do extra tax paperwork, remember what’s at stake.
“It is important to know that, if you are not claiming any credits and taking a standard deduction, you should receive as small a refund as possible,” Rosatti said. “This means you are maximizing your take-home pay during the year and not providing a loan to the government while overpaying your income taxes throughout the year.”
Methodology: GOBankingRates surveyed 1,000 Americans aged 18 and older from across the country between Jan. 31 and Feb. 1, 2022, asking six questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund? (Select all that apply); (5) Do you feel confident you are receiving all the deductions you feel qualified for?; and (6) If you received the Child Tax Credit this past year (2021) how do you feel it will affect your taxes? All respondents had to pass a screener question of: Do you plan to file taxes in 2022?, with an answer of “Yes”. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.