This Trick Will Get You a Bigger Tax Refund — But Should You Use It?
The W-4 is an IRS tax form filled out by employees and used by an employer to withhold the correct federal income tax from a worker’s paycheck each pay period. The amount of income tax withheld compared to what you owe will determine how much of a refund you may receive. If your employer withholds more income tax than you owe, you will get a bigger tax refund. If not enough tax is withheld, you may owe when filing season rolls around.
It is a form that can be changed each year, and depending on your personal and financial well-being at any given time, it is something that can be manipulated to pay you less per paycheck for a bigger bonus at tax time.
According to TaxAct, prior to the Tax Cuts and Jobs Act of 2017, personal and dependency exemptions were allowed to be claimed when you filed your taxes. These could be used to lower taxes withheld from your wages. After this tax law was enacted, personal exemptions were eliminated and the standard deduction was significantly increased, from $6,500 to $12,550 for individuals and from $13,000 to $25,100 for those filing jointly.
Due to these increases in the standard deduction, many more Americans choose to use it rather than itemize deductions. And the W-4 is markedly easier to fill out now, making it simpler to record accurate withholding for employees, while at the same time, allowing them tofine-tune their own finances, including bumping up their tax refunds.
While not exactly a trick, you can easily adjust your W-4 to receive a bigger tax refund instead of claiming the standard deduction. But should you?
When and Why Should You Adjust Your W-4?
As an employee, you can adjust your withholding amount any time during the year. Most people take a look at their W-4s when budgeting for a major life event is required — for the birth of a child, a marriage or divorce, new job for you or your spouse, purchasing a home — but the IRS recommends checking it once a year.
Withholding more tax throughout the year might actually help some people save. As CNET noted, “Lending the IRS your money for 12 months or more at no interest might seem nuts to the financially disciplined, it’s an undeniably bulletproof method of saving money. You might not be earning interest, but you’re not spending it.”
If you can live with more taxes withheld per paycheck, a bigger payout at tax time might give you an annual windfall that can be thrown directly in your long-term savings account or used to pay off nagging bills or debts.
How To Adjust Your W-4 for a Bigger Tax Refund
If you want to get a bigger tax return and change the withheld amount on your paychecks, simply add a desired amount of additional tax you want withheld each pay period on line 4(c) on your W-4, available from the IRS site or through your company’s HR/personnel/payroll department. The IRS also has an online Withholding Estimator that, along with most recent tax return, will help you figure out what adjustments you can handle.
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As CNET stated, the extra withholding line can be used by those who find themselves paying too much tax every year. By dividing the amount you usually pay in taxes by the number of paychecks you get annually, you’ll be able to determine how much extra should be held back to balance your tax return filing closer to $0.
Why a Big Tax Refund Isn’t Always a Good Thing
Isn’t a bigger tax refund always the best option? Not necessarily. As CNET pointed out, because your money is sitting with the IRS, it isn’t making you any interest for you. With inflation rates still at record highs, your money is earning you less that what it is worth.
For example, according to CNET, “That means that your $100 from September 2021 will get you about $92 worth of stuff these days. If you put that money into a Series I savings bond instead of letting the IRS hold it, you could get 9.62% back on your money right now, eliminating loss from inflation.”
Deciding whether to claim a standard deduction or go for a bigger tax refund is a tough call, and one that will be different for every individual’s financial needs and goals. But especially for those who have difficulty saving their money, withholding more income tax from your paycheck through a W-4 form adjustment might just be the perfect solution.
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