I received a large refund on my tax return this year. Should I adjust my withholding?
You must have been pleasantly surprised to find out you'd be getting a refund from the IRS — especially if it was a large sum. And while you
may have considered this type of windfall a stroke of good
fortune, is it really?
The IRS issued over 112 million federal income tax
refunds, averaging $2,895, for tax year 2016.1 You probably wouldn't pay
someone $240 each month in order to receive $2,900
back, without interest, at the end of a year. But that's
essentially what a tax refund is — a short-term loan to
Because you received a large refund on your
tax return this year, you may want to reevaluate your federal income tax
withholding. That way you could end up taking home more of your pay
and putting it to good use.
When determining the correct
withholding amount, your objective is to
have just enough withheld to prevent you from having to owe a large amount
of money or scramble for cash at tax time next year, or from owing a penalty for having too little withheld.
It's generally a good idea to check your
withholding periodically. This is particularly important
when something changes in your life; for example,
if you get married, divorced, or have a child; you or
your spouse change jobs; or your financial situation
Furthermore, the implementation of the new tax law
at the beginning of 2018 means your withholding
could be off more than it might be in a typical year.
Employers withhold taxes from paychecks based on W-4 information and IRS withholding
tables. The IRS released
2018 calculation tables reflecting the new rates and
rules earlier this year. Even so, the old W-4 and worksheet
you previously gave to your employer reflect deductions and credits that have changed or
been eliminated under the new tax law.
The IRS has revised a useful online withholding
calculator that can help you determine the appropriate
amount of withholding. You still need to complete
and submit a new W-4 to your employer to make any
adjustments. Visit irs.gov for more information.
1Internal Revenue Service, 2018