Financial Fellow

Written by J.P. Wicklein

     Do you get a large tax refund from the federal government each year?  Instead of getting a large annual refund, would you rather have less money taken out of each paycheck for federal taxes?  If you find yourself financially constrained each month, or don’t like the idea of the government holding too much of your earnings, you should consider reducing the size of your hefty annual federal tax refund.  

How to reduce your federal tax refund

     To reduce the size of your tax refund you will need to lower the amount of federal income tax that is withheld from each paycheck.  This can be done by increasing the number of allowances you provided on your W-4 form.  The W-4 form, also known as the “Employee’s Withholding Allowance Certificate”, is what your employer uses to determine how much money to withhold from your check for federal income taxes.  (You probably filled out this form during your first day of work.) 

     You will need to complete anywhere between one and three worksheets on the W-4 form depending upon your marital status, number of jobs, and whether or not you itemize your deductions.  Fill out the final portion of the form, the “Employee’s Withholding Allowance Certificate”, based off your answers in the worksheet(s).  (The entire process shouldn’t take more than 30 minutes).  Once completed, give the “Employee’s Withholding Allowance Certificate” to your employer. 

     The table below provides a simple example of how increasing the number of allowances can reduce the tax refund of someone squarely in the 25% tax bracket and, put more money in their pocket each month. [1]

     From a purely financial standpoint it is better to have a smaller federal tax refund than a large one.  By holding onto your money (in the form of a large tax refund) the federal government is denying you the ability to generate interest off that portion of your income.   Additionally, reducing your federal tax refund will allow you to receive the money you have earned faster.  That said you may prefer to have the federal government hold onto your money and receive a large check each year.  At least now you know how to reduce the size of your refund if you ever choose to do so.