This may sound odd, but when you get a federal tax refund, you may be withholding too much money from your paycheck.
Most people love the idea of tax refunds, but in reality you’ve given Uncle Sam an interest-free loan for a year or so. Here’s what the IRS suggests you do to avoid that:
- Check with your employer to update your withholding or submit a new Form W-4, Employee’s Withholding Certificate.
- Taxpayers whose employers withhold federal income tax from their paycheck can use the IRS Tax Withholding Estimator to help decide if they should make a change to their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides recommendations to help aim for the withholding amount that’s right for them.
- Individuals should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If they don’t make any changes, they will likely owe additional tax and possibly penalties when filing their tax return.
- Individuals should generally decrease their withholding if they qualify for income tax credits or deductions other than the basic standard deduction.
- Either way, those who need to adjust their withholding must submit the new W-4 information to their employer as soon as possible since withholding occurs throughout the year.