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Getting a refund every tax season can feel like a big windfall. But if your refund is over $1,000, that’s a sign that you may be overpaying the Internal Revenue Service.
Many of us count on our tax refunds to pay down debt, fund emergency savings or to make ends meet. If you’ve been living paycheck-to-paycheck, you might find that spreading that refund out over the year to boost your paychecks may be more helpful. As an accountant and accredited financial counselor, it’s a problem my clients face far too often. They don’t want to risk not paying enough and potentially owing a tax bill, but they’d also like to get more back in their paychecks.
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Here’s what I recommend if you think you might be giving the IRS too much money throughout the year.
How to avoid overpaying and underpaying the IRS
Tax overpayment happens when too much is withheld from your paycheck or when estimated tax payments exceed what you owe. This often occurs when an employee claims too few exemptions on their Employee’s Withholding Certificate, otherwise known as a W-4 form.
If it’s been over five years since you last updated your W-4, there’s a chance you could be overpaying. This is especially true if you’ve had life events that could afffect your taxes overall, such as kids, marriage or divorce. If federal taxes are withheld from your paycheck, I suggest reviewing your W-4 form and updating it if you’d like more in your take-home pay. For example, if you’re currently claiming “0” exemptions on your W-4, claiming “1” will reduce the amount of money withheld for taxes, so you’ll see more in your paycheck.
Changing your exemptions might not always make sense. You may not want to pay the government too little and owe money in taxes each year. I always recommend that my clients use an estimated tax tool to help them estimate how much they should pay throughout the year — like the IRS Tax Withholding Estimator. This tool guides you through different prompts to estimate your tax liability based on your personal situation. It also shows you how adjusting your withholdings could affect your paycheck. I encourage you to reach out to an accountant if you have any questions about your withholdings.
If you’re self-employed or have a side hustle, this estimator tool still works. For self-employment income, I suggest entering your earnings after deducting expenses for a more accurate picture of what you owe. That can help you stay on track with estimated quarterly taxes, too.
You can still get a refund without overpaying
You can still get a tax refund without overpaying the IRS. Tax refunds come from two main sources: overpaid taxes and refundable credits. If you’re eligible for refundable credits — tax credits that can increase your tax refund — you can still see a small boon during tax season.
One of the most popular refundable credits is the Earned Income Tax Credit. For example, if your adjusted gross income was $18,591 or less in 2024, you could qualify for up to $632 in refunds — even without a dependent. There are other refundable credits, such as the Child Tax Credit, the American Opportunity Tax Credit and the Premium Tax Credit.
You may choose a big tax refund, and that’s OK
Deciding whether you want more money in your paycheck or a lump sum during tax season is a personal decision. Just make sure you know the tradeoffs.
For example, if saving money is a challenge for you, you might opt to overpay the IRS so you’ll have a built-in savings cushion each year. Although it may not be the most efficient way to save, that big refund check can help you meet your savings goals. The tradeoff is that you’re not earning any interest by loaning that money to the federal government throughout the year. Instead, if you had fewer taxes withdrawn from your paycheck and put that same money into a high-yield savings account each pay period, you’d earn interest, growing your savings even more.
However, if you’re worried about owing taxes or if you have a side hustle, you might prefer overpaying to help offset your tax bill.
If you’re unsure how much you should be withholding from your paychecks, or what it could mean for your tax refund, talk to an accountant or tax professional. You can also sign up for free local workshops to learn more about taxes. Check with your local library, community college or community centers. The more you know about how your taxes affect your filing, the more comfortable you may feel about making adjustments.