I’ve discussed often why getting a tax refund might not be such a great idea. The reason is pretty simple; getting an income tax refund from the IRS means that you have essentially overpaid your taxes for that year and have given the IRS an interest free loan. Instead you could have used that money better by saving, paying down debt, or investing. With the average tax refund hovering around $3,000 a year, that’s $250 a month that you could instead be using. But often I hear that people don’t know how to decrease their withholdings.
To stop getting a refund, or not have to owe the IRS at the end of the year, you need to adjust your W-4 if you are an employee. A W-4 is a form used by employers to determine how much money to hold back for the IRS each paycheck. To decrease or increase your withholdings you have to change the amount of dependents you are claiming. Dependents include yourself, your spouse, and any children you have. The more dependents you have, the less taxes you have taken out. The less dependents you have, the more taxes you have taken out. At the very minimum you probably need to claim at least how many people live in your home. For example if you have two adults and two children in your home , you should claim four dependents. But if you have two adults and three children in your home, you should claim five dependents.
The problem, however, is that taxes are unique to everybody depending on variable factors such as income, dependents, and deductions. This means that it is almost impossible for your employer to withhold the right amount of taxes based on your dependents; it is usually too much. So that means you have to do it yourself. To do that go back and figure out how much of a refund you got last year. Divide that amount by 12 and that is how much you need to decrease your withholdings each month. For example, if last year you got a $24,000 refund, that means you had $200 a month too much withheld. So increase your withholdings to have $200 less taken out of your paycheck each month.
For me, personally my family consists of me, my wife, and our son. I claim 10 dependents on my W-4 and usually come within $100 of nailing it exactly. You don’t have to get the magic number down to zero, but you are not breaking any laws by claiming more dependents then you actually have. The IRS is never sent this information. So if you are tired of getting a big refund every April and you want YOUR money now, talk to your HR department about adjusting your W-4 and get the right amount taken out of each paycheck.