Should You Adjust Your W-4 To Get a Bigger Tax Refund Next Year?

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It’s that time of year again: Tax time — the annual event where forms, numbers and deductions pile up, and the hope is always to avoid an unpleasant surprise.

For many, the dream is a tax refund — a nice little financial cushion that feels like a bonus. But here’s the question: Should adjustments to the W-4 be made to try and inflate that refund?

It’s easy to get caught up in the idea, but don’t panic, just organize. GOBankingRates broke it down and explore the best approach.

Also find out the smartest ways to put your tax refund to good use.

What Is the W-4, Anyway?

If filling out a W-4 feels like just another task that’s easy to breeze through, that’s completely understandable. In simple terms, the W-4 tells an employer how much to withhold from each paycheck for federal income taxes. It’s filled out when starting a new job or when there’s a need to adjust withholding preferences, which affects the amount of take-home pay each period.

The IRS redesigned the W-4 in 2020 to simplify things by eliminating the confusing allowances system, which left many unsure of their actual tax payments. Now, it focuses on personal information — such as filing status, dependents and any additional income or deductions. This helps the IRS determine the right amount to withhold so there are no surprises when tax season arrives.

Why Do People Want Bigger Refunds?

A refund check can feel like a financial boost — a lump sum, often hundreds or even thousands of dollars, landing in an account after a year of paying taxes.

It’s easy to see why this might seem like a win. However, adjusting a W-4 for a larger refund may only offer a temporary solution to a bigger financial picture. The desire for a larger refund comes from the appeal of “free money” — a sudden financial windfall that gives the impression of coming out ahead.

But it’s important to remember that the IRS isn’t simply giving away money. This refund is essentially cash that was already taken from a paycheck throughout the year. The key point is that this money could have been available throughout the year, potentially earning interest or being put to better use — such as paying down debt, investing or providing more room in a monthly budget.

The Temptation of a Larger Refund: Pros and Cons

The idea of adjusting a W-4 to receive a larger refund is tempting. After all, who wouldn’t appreciate extra cash from the IRS? However, it’s important to understand the trade-offs involved.

Pros:

• Lump-sum surprise: A large refund can feel like a financial reset, perfect for specific purchases or paying off debt.
• Feel-good factor: Getting a refund can feel rewarding, as it signals responsible tax management.
• Easy savings plan: A refund acts as an easy, automatic savings plan.

Cons:

• Less cash in hand: More withholding means less take-home pay, possibly causing tighter budgets and increased stress.
• Interest-free loan: A refund is money already earned, returned without interest — money that could have been used for investments or savings.
• False sense of financial health: A large refund could signal over-withholding, which might not be the best strategy for long-term financial health.

What’s the Alternative?

If a big tax refund isn’t the goal, adjusting the W-4 to keep more of the paycheck throughout the year might be the way to go. This means more cash each pay period, but it requires staying on top of finances to avoid an unexpected tax bill.

Having more money now means it can be used for things like paying off high-interest debt, saving for a home or just creating some breathing room in the budget. After all, waiting for a refund is like giving the government an interest-free loan.

The IRS has a Tax Withholding Estimator to help find the right balance. It helps avoid overpaying, underpaying or any surprises when taxes are due.

So, Should You Adjust Your W-4?

The choice really comes down to financial goals. If a tax refund feels like a built-in savings plan, tweaking the W-4 for a bigger refund might sound nice. But it’s worth considering whether giving up monthly flexibility is worth that year-end check.

Adjusting the W-4 to keep more money in the paycheck throughout the year can give greater control over finances. The goal is to have just the right amount withheld so taxes aren’t a surprise — whether overpaid or underpaid.

In the end, it’s about choosing between a small win now or a bigger win later. Finding the balance that works best for a lifestyle and priorities is key. And that’s a job the IRS (or the W-4) can’t do — it’s all about figuring out what works best.

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