How to Reduce Your Tax Refund

The title of this article may seem somewhat counterintuitive. Why would anyone want to reduce their tax refund?

While many people would rather get a refund than owe taxes come April 15, the fact is, if you are receiving a refund, you have given the government a loan. The IRS has withheld too much of your money throughout the tax year. Now through the process of filing your income tax return, you are getting your money back.

Since you are not receiving interest or other benefits through your loan to the IRS, it would be better if you reduce your tax refund to zero. In this way, you would have that money available to use throughout the year. Uses include investing the money to earn a return, paying down other debt, or splurging on that additional luxury item you were not sure you could afford.

Following are a few tips on how you can reduce your tax refund to zero and keep it there.

Increase the Allowances Claimed on Your W-4

Your employer withholds money from your paycheck for income tax based on the number of allowances claimed on your W-4. Your employer sends this withheld money to the IRS, which is used to satisfy your federal income tax debt.

The more allowances you claim, the less money your employer withholds from your paycheck. Inversely, the fewer allowances you claim, the more money your employer withholds.

You can increase the number of allowances claimed on your W-4, thereby reducing the amount of money you are loaning to the IRS, by asking your employer for a new W-4. You can then update the W-4 with the appropriate number of allowances.

Once you have updated the allowance on your W-4, you should monitor the amount being withheld from your ongoing paychecks. If your circumstances have not changed such that the amount of income tax you owe will be difference, you can likely determine if enough is being withheld to bring your income tax refund close to zero.

Account for Life Events

Once you have your withholding at the right amount so that you income tax refund is close to zero, you will need to account for life events that may change the amount of income tax you owe. Those life events can include but may not be limited to the following:

Getting a new or second job

If your or your spouse’s employment situation change such that you make more money, it can increase the amount of income tax you owe. With an increase in your income tax, you may have to reduce the number of allowances on your W-4 so that you are not surprised by the amount of tax you owe when you file your tax return.

Having a baby

Whether you give birth to or adopt a baby, you can now claim an additional dependent on your tax return. You may also qualify for a Child Tax Credit. Both of these will reduce your tax liability, which means you can reduce the amount of withholding by your employer.

Getting married or divorced

Getting married or divorced can affect your tax rate, especially when both spouses work. Marriage and divorce will also change your filing status, which will likewise change your income tax. For either event, you may need to adjust your W-4 to keep your tax refund close to zero.

How can I get further help with my taxes?

A tax attorney can answer your other questions and help you file your return to maximize your deductions. You can get in touch with a tax attorney in your area by completing the form below or by calling the phone number at the top of this web site.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.