Hoping for a big tax refund this year? Not so fast—a large refund isn’t necessarily a good thing. In fact, for many people, a smaller refund is preferable to a massive check from the government.
Here’s what you need to know about tax refunds and why bigger isn’t always better.
What determines the amount of my tax return?
When you receive a tax refund, you’re getting paid back for money you overpaid the government from your earnings during the previous year. If you owe money after filing your tax return, that means you underpaid the government.
If you’re employed full-time, you fill out a W-4 form that’s used to determine how much money will be withheld from each of your paychecks for tax payments. If you’re self-employed, you pay your estimated taxes each quarter.
When you don’t withhold enough on your W-4 form—for example, if you don’t claim all of your tax dependents—you’ll end up paying more than you actually owe toward your taxes.
Why wouldn’t I want a big tax refund?
If you routinely receive a fat refund check after filing your taxes, it means you’re overpaying on your taxes throughout the year. While your refund might seem like a nice windfall come February or March, it’s ultimately money you could be keeping in your pocket all year long, rather than receiving it later on in the form of a tax refund.
In most cases, a big refund indicates you aren’t taking all of the withholdings and tax deductions you’re eligible for. You can fix this by adjusting your tax withholdings with your employer. It’s also a good idea to adjust your withholdings after some major life changes, like getting married or divorced, having a child or taking on a second job.
How do I update my tax withholding?
Fill out a new W-4 form to submit to your employer. When in doubt, your employer’s human resources department can point you in the right direction.
If you’re self-employed, review the IRS’s guidelines for calculating your estimated quarterly tax payments to make sure that you’re taking all of your eligible deductions.