The 2024 tax season started off slow, but the average tax refund has now increased to $3,070, a 6% increase from the previous year. While receiving a tax refund is always nice, it may not be as beneficial as it seems, as it represents money that was overpaid to the government throughout the year. It is possible to adjust the size of your tax refund by making changes to your IRS W-4 form, which dictates how much money is withheld from your paycheck for federal taxes.
The W-4 form was revised in 2020 to simplify the withholding system and eliminate withholding allowances. To increase the size of your tax refund, you can designate a larger amount of your paycheck to be withheld by entering the extra amount on line 4(c) of the W-4 form. On the other hand, if you find yourself owing taxes each year, adding extra withholding can reduce your tax burden to zero. While allowing the IRS to hold onto your money without interest may not seem financially savvy, it can be viewed as a way to save money.
Increasing your withholding to get a bigger tax refund may not be the best financial decision, as you are essentially allowing the IRS to hold onto your money interest-free for an extended period. Inflation can erode the value of your refund over time, making it more beneficial to have that money available to you throughout the year. Adjusting your W-4 form to get more money back in your paycheck can be done by increasing deductions, such as student loan interest or IRA contributions, to match the amount on your income tax return.
It is important to consider your personal tax situation before making adjustments to your W-4 form, as changes in circumstances like the birth of a child, marriage, divorce, or major tax changes can impact your tax liability. You can adjust your W-4 form at any time, with your employer required to implement the changes by the next payroll period. The IRS provides a tax withholding estimator tool to help you determine how to adjust your W-4 form to pay more or less taxes throughout the year from your paycheck. It is advisable to consult with a tax expert before making any changes to ensure you are making the most informed decisions.
