Tax season means receiving a generous refund from the state and federal government. Last year, an individual taxpayer received an average of about $3,176 tax return.
The federal government returns the difference from the excess money they collected all year. In a way, the tax refund is a return of some money withheld from your paycheck throughout the year.
You might think getting a large refund is good, but it could haunt you for the next tax season.
Why is Receiving a Large Tax Refund a Red Flag?
The IRS issued more than $171 billion in refunds for the 2021 fiscal year, and more tax returns are to be distributed due to delays in last year’s tax-filing process. This means that taxpayers give the government an interest-free loan.
For instance, if you have more than $1,000 in a refund, you allow the government to hold your money over the past year. GoBankingRates recommend decreasing your tax withholding to decrease the amount of your refund. Take note that the less you have withheld, the smaller your tax refund and the more money you’ll get in each paycheck.
But you have to remember that reducing too much of your withholding will result in an outstanding balance at the end of the year. The IRS will drop off a tax bill when you file your returns.
GoBankingRates recommends adjusting your withholding tax to receive a smaller refund and more money in each paycheck. (Photo: TaxGuro)
Find out: 2023 Tax Season Guide: How to Get Better Tax Refund This Year
More: 2023 Tax Season: Guide for New Parents
Adjust Your Withholding
The IRS has changed the process of calculating your withholding by changing the W-4 Form, which you must submit to your employer.
The first step in this process is gathering information about any other income you earn, pay statements and most recent tax returns. You can use the IRS’s Tax Withholding Estimator tool to help you guide through the process. You can also use the tool if there is a change in your life circumstances, such as getting married, your spouse’s working status, having a baby, or getting a second job. If you still receive a larger refund than you would like, then it is imperative to adjust your withholding again.
The main takeaway is to get extra money in each paycheck rather than a lump sum. You can use your extra money for paying off debt, saving, or investing it for future use.
Read More: People who Must Submit a Tax Return: Not Everybody Requires It, These Guidelines Apply
