Got a Big Tax Refund? You May Be Overpaying the IRS. Here’s Why

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Getting a tax refund can really feel like a monetary reduction. Maybe it is the windfall you’ve got been ready for because the holidays to pay down bank card debt or inch towards a financial savings purpose. But in case your refund is over $1,000, it’s possible you’ll be overpaying the Internal Revenue Service. 

If you’ve got been dwelling paycheck-to-paycheck, that refund could have extra been useful if it have been unfold out over paychecks all year long. At the identical time, there’s additionally the worry of not paying the IRS sufficient, after which owing greater than you possibly can afford. As an accountant and accredited monetary counselor, it is an issue my shoppers face far too usually. 

Here’s what I like to recommend should you suppose you could be giving the IRS an excessive amount of cash all year long.

How to keep away from overpaying and underpaying the IRS

Tax overpayment occurs when an excessive amount of is withheld out of your paycheck or when estimated tax funds exceed what you owe. This usually happens when an worker claims too few exemptions on their Employee’s Withholding Certificate, in any other case referred to as a W-4 kind.

If it has been over 5 years because you final up to date your W-4, there’s an opportunity you could possibly be overpaying. This is particularly true should you’ve had life occasions that might afffect your taxes total, resembling children, marriage or divorce. If federal taxes are withheld out of your paycheck, I recommend reviewing your W-4 kind and updating it if you would like extra in your take-home pay. For instance, should you’re at present claiming “0” exemptions in your W-4, claiming “1” will cut back the amount of cash withheld for taxes, so you may see extra in your paycheck. 

Changing your exemptions won’t at all times make sense. You could not need to pay the federal government too little and owe cash in taxes annually. I at all times suggest that my shoppers use an estimated tax device to assist them estimate how a lot they need to pay all year long — just like the IRS Tax Withholding Estimator. This device guides you thru totally different prompts to estimate your tax legal responsibility primarily based in your private scenario. It additionally reveals you the way adjusting your withholdings might have an effect on your paycheck. I encourage you to achieve out to an accountant when you have any questions on your withholdings.

You can nonetheless get a refund with out overpaying

You can nonetheless get a tax refund with out overpaying the IRS. Tax refunds come from two essential sources: overpaid taxes and refundable credit. If you are eligible for refundable credit — tax credit that may improve your tax refund — you possibly can nonetheless see a small boon throughout tax season.

One of the most well-liked refundable credit is the Earned Income Tax Credit. For instance, in case your adjusted gross earnings was $18,591 or much less in 2024, you could possibly qualify for as much as $632 in refunds — even with out a dependent. There are different refundable credit, such because the Child Tax Credit, the American Opportunity Tax Credit and the Premium Tax Credit. 

You could select an enormous tax refund, and that is OK

Deciding whether or not you need more cash in your paycheck or a lump sum throughout tax season is a private determination. Just be sure to know the tradeoffs.

For instance, if saving cash is a problem for you, you may decide to overpay the IRS so you may have a built-in financial savings cushion annually. Although it is probably not probably the most environment friendly option to save, that massive refund verify can assist you meet your financial savings targets. The tradeoff is that you simply’re not incomes any curiosity by loaning that cash to the federal authorities all year long. Instead, should you had fewer taxes withdrawn out of your paycheck and put that very same cash right into a high-yield financial savings account every pay interval, you’d earn curiosity, rising your financial savings much more.

However, should you’re fearful about owing taxes or when you have a aspect hustle, you may desire overpaying to assist offset your tax invoice. 

If you are not sure how a lot you need to be withholding out of your paychecks, or what it might imply on your tax refund, discuss to an accountant or tax skilled. You also can join free native workshops to be taught extra about taxes. Check together with your native library, neighborhood school or neighborhood facilities. The extra you recognize about how your taxes have an effect on your submitting, the extra snug it’s possible you’ll really feel about making changes.