Most Americans want a big refund when filing their personal income taxes. But there may be situations where it's better not to receive a large refund. How can you decide, and what can you do about it? Here is some help answering the question of whether you should voluntarily reduce your refund.
Is the Refund from Refundable Credits or Not?
There are basically two ways to get a refund. One is to receive refundable tax credits, such as the Earned Income Tax Credit or the Additional Child Tax Credit. These tax credits can be refunded to you even if you owe no taxes, and they are . If your tax refund is largely made up of refundable credits — found in the last section of Form 1040 under "Payments" — then you must wait until tax time to receive them.
However, if your refund is not made up of many tax credits, then it largely consists of your own money sent as withholding throughout the year. You are essentially giving the IRS use of that money at no interest for the year until you request a refund each spring.
Do You Owe Certain Debts?
If you're delinquent on certain types of debts, the IRS can use your tax refund to pay them without your permission. This is called a refund offset. Generally, delinquent debts that can trigger an offset include unpaid income taxes (state or federal), student loans, and child support.
If you know you are delinquent in any of these debts, it behooves you not to overpay your withholding so that there is less chance that money will be kept for an offset.
Can You Make Better Use of the Money?
Money sent to the state or the IRS as withholding throughout the year cannot be used by you and your family. If your monthly budget is struggling, it may be better not to wait until spring to request a refund of your own money back. and if you can earn interest or dividends by using it to boost your retirement contributions or taxable investments, then that is a better rate of return than the 0% you will receive by paying too much in withholding.
So, How Can You Reduce Your Refund?
Many taxpayers may not understand that they can control how much of each paycheck is withheld by their employers. To change your withholding instructions, talk to your employer's payroll department or fill out a new Form W-4. Increasing the number of exemptions claimed will make your paycheck larger, as will claiming "married" instead of "single". Start in small increments to see how the change affects your paycheck.
What is the right choice for you? Only you and your tax preparer can answer that question. But by knowing the pros and cons of reducing your refund, you can make the right call and improve your financial future. Contact a service, like The Tax Genius , for more help.Share