An Easy Way to Fatten Your Next Tax Refund Today

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Tax refund check coming out of mailbox
Jim Barber /

Was your tax refund smaller than you expected this year? Or, was your refund or tax bill too big? If so, making a simple change today can help you avoid the same fate next year.

Now that the tax season is behind us, the IRS is reminding taxpayers — both workers and retirees — to check their withholding.

Your current withholding will directly affect your next tax return — the one that’s due in spring 2022 — and thus your next tax refund or tax bill.

For employees, “withholding” refers to the portion of their paycheck that their employer withholds for federal income taxes. For retirees, it refers to any money withheld from their retirement income — such as Social Security or annuity payments — for federal taxes.

Employees, the self-employed and retirees alike all can check their withholding by using the IRS’ free withholding estimator.

Following the steps outlined in the calculator should give you a good sense of whether you need to make an adjustment to your withholding. As the IRS notes:

“This online tool offers workers, self-employed individuals and retirees who have wage income a user-friendly resource for effectively tailoring the amount of income tax withheld from wages.”

Should you adjust your withholding?

Just because you can adjust your withholding doesn’t necessarily mean you should.

Over time, millions of taxpayers have learned to count on getting a big refund. But in reality, that is often poor money management.

A large refund at tax time means you have given the government an interest-free loan over the course of the year.

Financially, you’d be better off not having that money withheld from your check. Instead, get the money upfront and park it in a savings account paying a high rate of interest.

That means your money can grow throughout the course of the year, which should result in more cash in your pocket than if you waited for a simple refund from the government later on.

You could also do other things with that money when it’s no longer being withheld from your paycheck, such as investing it or using it to pay down debts. The point is that for many people, having the money upfront makes the best financial sense.

Of course, all of this assumes you are not a spendthrift who struggles to control impulse spending. If that sounds like you — and sadly, millions of us are in this boat — it might make sense to have more withheld from your paycheck after all.

For those of us who lack the discipline to save, having more withheld is the equivalent of teaming up with the government so we can curb our worst instincts and save more. After all, if you don’t see the money in your paycheck, you (hopefully) will be less tempted to spend.

Another upside of a tax refund amid high inflation

When inflation is high — and it’s currently at a 40-year high — there is another upside of receiving a tax refund: the ability to buy up to $5,000 more in Series I savings bonds.

The return on this type of savings bond is tied in part to inflation — which is why it’s expected to jump to a record high of 9.62% on May 2.

You can only buy so much in Series I savings bonds each year, however. As we have explained:

“… you can only purchase $10,000 worth of electronic I bonds during a calendar year in most cases. You can purchase an additional $5,000 in paper I bonds as well, but only if you use your federal income tax refund to do so.”

Let’s say you receive a $1,000 refund next year, for example. That would mean you could purchase up to $10,000 of electronic I bonds (i.e., I bonds purchased via plus up to $1,000 of paper I bonds (i.e., I bonds purchased via your tax refund) in 2023, for a total of up to $11,000 in I bonds in 2023.

To buy I bonds with a refund, you fill out and attach Form 8888 to your tax return — or, have your tax pro or tax software handle it.

To learn more, check out our latest I bonds article.

How to adjust your withholding

If you determine that you want to adjust your withholding, find out if your employer has an automated system for doing so. If not, you can use your results from the withholding estimator to complete a new Form W-4, Employee’s Withholding Certificate, and then give that to your employer.

If you decide to adjust withholding from retirement income, you instead will need one or both of the following forms, depending on the type of retirement income:

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