Decide whether you want a big tax refund

The refund arrives, and the advice you get comes in two kinds. One says a big refund means you lent the government your own money for free. The other says a lump sum is how some people manage to save at all. Both are partly right, and each is describing somebody.

A big tax refund from over-withholding is your own pay held back all year, so choose it on purpose: keep it if a lump sum is how you really save, and fix your withholding if the extra pay in each paycheck would do you more good.

This page is about US federal income tax. If most of your refund comes from credits, if you have several incomes, or if you owe money to the government, read the last section first.

What a refund is

In the United States, a refund is what is left when the tax taken from your pay during the year, together with any refundable credits, is more than the tax you owe. The IRS’s own withholding estimator describes the two directions: having too little withheld can mean a penalty when you file, and having too much withheld means a smaller paycheck now and a bigger refund later. Many people say the same thing in their own words: a large refund means you lent the government your own money, with no interest, for the year, and that breaking even is the goal.

Some people say that is only half the picture. One person pointed out that credits are a major reason for refunds, not only over-withholding, and some people say that for some lower-income workers the refund comes from credits and not from over-withholding at all. One person says the “free loan” idea fits only withheld tax, because a credit is money earned and not money returned. The IRS says a credit such as the Earned Income Tax Credit can reduce what you owe and may increase your refund, and that refunds on returns claiming it are held by law until mid-February.

Changing what comes out of your paycheck

In the US you change withholding by giving your employer a new Form W-4. The IRS says to consider filling one in each year and whenever your situation changes, and its withholding estimator is the tool for working out the figures: it asks for your latest paystubs and your latest return. One person pointed out that the current form no longer uses “exemptions” in the old sense, so advice that tells you to claim a number of them may be out of date. Some people note that the change goes through your employer’s payroll and is not instant.

The risk is owing. The IRS says you may owe a penalty if you did not pay enough through the year, through withholding or estimated payments, and gives two general ways to avoid it: owing less than $1,000 after withholding and refundable credits, or paying in at least 90 percent of this year’s tax or 100 percent of last year’s, whichever is smaller. Those are the general rules, and the IRS page has more conditions, including special rules for some higher-income taxpayers. Some people warn that cutting too far leaves you with a bill and a penalty, and one person adds that you should change it gradually. Some people say hitting exactly zero is hard, and that aiming for it can still leave a refund because of credits or errors in the estimate. One person says a small refund is fine, because it spares you the stress of checking your paystubs every quarter and the risk of a penalty. Some people say the interest you would earn on the money is small and may not be worth the trouble of changing the form.

Where the money would go to debt that charges high interest, some people say the saving is real. One person suggests a middle way if you want a lump sum but fear spending it: set up an automatic transfer so part of the expected refund moves to savings as soon as it arrives.

Do not count on it before it comes

Some people warn that refunds change with your pay, your withholding, your life events and the tax rules, so it is risky to plan a large expense around a particular amount. Some people also warn that stores advertise sales aimed at refund season, and that purchases made on impulse are the ones people regret or end up pawning.

If you owe certain debts, the refund can be reduced before you get it. The IRS lists past-due child support, some non-tax debts to federal agencies, state income tax and some state unemployment debts, and says the Bureau of the Fiscal Service will mail a notice showing the original refund, the amount taken and the agency that received it. The IRS also lists owing federal taxes from an earlier year as a reason a refund can come out smaller. One person warns that a large refund taken in cash can be a safety risk, and that you should not mention refund amounts to other people.

A refund text or email you did not ask for

The IRS lists the signs of a scam as a message you did not expect, one that rushes or threatens you, one that offers refunds, credits or deductions, or one that pressures you for personal or financial information. Do not click. To see where your real refund is, use the IRS refund tracker or your online IRS account, and report a scam through the IRS’s fraud reporting page. In the UK, GOV.UK has guides for checking whether an HMRC email, text message or phone call is genuine.

Who this page is not for

If most of your refund comes from credits, there is no withholding to adjust, and the choice this page describes is not yours. One person warns that if you receive the Earned Income Tax Credit you may get a refund whatever you do with your withholding.

If you have more than one job, or income from work for yourself, changing withholding is harder, and one person warns that missing a second earner on the form leads to an unexpected bill, and another that business owners can be fined for not making quarterly estimated payments. Some people with several sources of income say they over-withhold on purpose so they do not have to work out those payments. Free tax preparation help (see the links below), a tax professional or the estimator are better places to start than this page.

If you do not feel comfortable working out your own tax, do not change withholding sharply without understanding the sums, because it can leave you owing and facing a penalty. If you know you would spend extra pay in each paycheck without noticing, some people say that is a good reason to keep the lump sum.

In the UK there is no Form W-4. Tax comes out through PAYE under a tax code, and GOV.UK says that if you have paid too much, HMRC asks your employer or pension provider to refund the difference in your pay, usually once the new tax code is in use; if you have paid too little, it usually adjusts your tax code to collect the tax over time. You can check your tax code on GOV.UK, on your payslip or in the HMRC app.