Want a Bigger Refund Next Year? Adjust Your W4tax tips | July 20, 2017 | By Susannah McQuitty
Whether you want a bigger refund at the end of the year or more money per paycheck, adjusting your W-4 is the best way to control your tax outcome.
A Form W-4 is where you detail how much money you’d like your employer to hold back from each paycheck to cover your taxes. The more money your employer withholds for taxes, the more likely you are to have a refund in the spring. On the flipside, the less money your employer takes out of each paycheck, the smaller your refund.
So which one is better, a bigger refund or a bigger paycheck? That’s really up to you, but if you’re not sure of your preference, take a look at the pros and cons of both.
Pros and Cons of a Bigger Refund Goal
If you want a bigger refund, there’s a small catch: A refund is actually the amount of money you overpaid in taxes over the course of the year, not a bonus check. The IRS isn’t paying you, it’s actually just handing over your change – like if the grocery store only returned your nickels and dimes once a year instead of every time you check out.
The Pros: You’re covering more than enough of your taxes by handing over more money per paycheck, plus you’re saving money and keeping it “out of sight, out of mind.”
The Cons: You’ll have less money per paycheck, and any money you save won’t be accessible until you get your refund. No emergency takebacks, and no interest on the money that’s just sitting in the IRS coffers.
Pros and Cons of a Bigger Paycheck Goal
Let’s say you’d rather take more money per paycheck than nab a bunch of cash once a year. Maybe you want to use that money for bills, and maybe you’re still going to save it while taking advantage of interest on a bank account.
The Pros: More money per paycheck means better control of your funds throughout the year. Need emergency money? You’ve got it. Surprise bills catch you off guard? You’ve got a buffer. Plus, if you have your own saving account, you’re making money off of bank interest.
The Cons: You have to be careful when you estimate how much tax you’ll owe for the year when you’re trying to cover the bare minimum of your tax obligation. If you don’t have enough withheld throughout the year to cover your taxes, you’ll end up owing money when your return gets processed. Worst-case scenario, you could wind up with an underpayment penalty if you grossly understate your tax responsibility.
How to adjust your W-4
The IRS has a questionnaire to help you adjust your W4 (like one of those “what kind of pizza topping would you be” quizzes you took last week—only with taxes, so WAY more fun).
To use it, you’ll want to have a pay stub and a copy of your 2016 tax return on hand. These aren’t required, but the more accurate your input, the easier it is to know if you should adjust your W-4.
Once you get to the end of the questionnaire, the calculator will give a recommended amount of allowances to claim (the more you claim, the more money you get per paycheck). After that, simply download and print a W-4, fill out the information with your preferred number of allowances, and give the paperwork to your employer.
That’s it! Which would you rather do? Let us know in the comments below!