Getting a Big Refund Check? Should You Adjust Your Withholding?

Are you getting a large tax refund check? Should you adjust your withholding? Here is how to find out... It’s the time of year that millions of Americans feel like they’ve just won the lottery. A friend boasts, “I just got my $3,500 tax refund.” His friend tries to suppress his smile. “Wow, that’s great. I got a $5,000 check this year.” However, we all (at least we should) know better than that....It’s the time of year that millions of Americans feel like they’ve just won the lottery.

A friend boasts, “I just got my $3,500 tax refund.”

His friend tries to suppress his smile. “Wow, that’s great. I got a $5,000 check this year.”

However, we all (at least we should) know better than that.

The larger the income tax return check you receive, the more money you’ve paid throughout the year. Of course, there are some exceptions for credits and things like that. But for most Americans, a tax refund check just means you paid the government too much money and they are now giving it back.

Consider these questions:

  • Would you go into the grocery store and hand the clerk $250 every week for groceries and ask the store to write you a check at the end of the year if you over paid?
  • Would you ever send an extra $25 when you paid a utility bill?

For the most part, we tend to pay what we owe and often even complain that we even have to pay that much – except when it comes to taxes.

When it comes to taxes, some people love having a huge withholding so they can get a big fat check at the end of the year. Is it a good idea to get a big tax refund check?

Get a Big Tax Refund: Reasons Not to Adjust Your Tax Withholding

  1. Extra tax withholding is literally the only way you’ll save any money. It is a zero percent loan you’re giving to the government, but at least you’ll have something when your tax refund check arrives. The only question is, can you manage that big check if you couldn’t manage the money along the way?
  2. Emotional peace. Some people are so intimidated by everything tax related. They just feel better knowing that at least they won’t have to pay any more taxes at the end of the year. They are worried that they couldn’t pay their taxes if more was owing.
  3. Income fluctuations. When your income fluctuates you might prefer to pay a consistent amount, even if it is too much, simply to be sure that if your income goes up you’ve been making the proper payments.

Get a Small Tax Refund: Reasons to Adjust Your Tax Withholding

  1. We spend earned money differently than free money. When people get a big refund check, they usually plan to buy something with the refund. Even though you’ve earned that money, it feels like free money because it is a check in the mail that is not directly attached to your hard work.
  2. You can earn interest on that money in the bank. Sure, you won’t save a lot of interest (especially right now), but something is better than nothing.
  3. It’s simple to do (see the steps below). If you do your own taxes, you know that they are not as intimidating as people can make them out to be. While there are very complicated elements to taxes, changing your withholding is very simple.

How to Adjust Your Income Tax Withholding

If you are getting a big tax refund and want to make adjustments to your withholding, it is really quite simple.

If you are self employed, just make your estimated quarterly payments based on what you should have paid last year (assuming your financial and family conditions will remain the same).

If you are employed, you will need to visit your HR representative and get a new W-4. The W-4 tells the company how much to withhold from your pay. Make the necessary adjustments to dependents in order to get the withholding to match tax liability from the previous year. The goal is not getting the number of dependents right, but getting the withholding right.

What about you? Will you be adjusting your withholding?

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  1. Jeremy

    As a bankruptcy attorney who also works for a Chapter 7 trustee (so I see a lot of Chapter 7 cases), one of the things that strikes me is the large number of middle income people who get huge ($5,000+) tax refunds.

    Someone making $40,000/yr and getting a $7,000 refund is literally giving away a car or even a small mortgage payment every month. What usually happens is these families fill the gap in their take home pay with credit cards and other high-interest high-fee loans (including payday loans).

    They are borrowing at 20% or 30% from Citibank and lending to Uncle Sam at 0%. That doesn’t make business sense.

    What then happens is they run up $7,000 in credit card debt during the year–which grows to 8, 9 or 10 with interest–and then when the tax refunds come, they blow it on “toys”–ATVs, big screen tvs, new furniture, etc.

    A couple years of this, and a person now has credit card debt that exceeds their income and they are filing a Chapter 7.

    • Paula S

      Hi Jeremy, I never thought of it this way. Thanks for sharing.

  2. Travis Engebretsen

    Thank you for shedding light on the tax refund perspective. I have never understood why people would be excited about receiving their own money back at the end of the year. Your grocery and utility illustrations drive the point home. I think the only reason I could see for paying too much in taxes is the fear that one will have a big tax bill due at the end of the year. However, I would just try to be as accurate as possible rather than building in a big buffer intentionally.

    Also, since people pay the taxes throughout the year, the dollars they receive at the end of the year are worth even less than when they paid the taxes(time value of money, e.g. inflation), so they are actually losing money in real terms! Forget giving the government a free loan – you are actually paying for the “opportunity” to loan money to the government.

  3. Tim @ Faith and Finance

    I probably won’t be adjusting it this year. Our refund wasn’t anything to brag about (less than $1,000) but I’d rather pay $1,000 more than owe $1,000 because I didn’t plan correctly.

  4. Jon the Saver

    This is such a hot topic at my work right now! I’ve debated this over and over, but I will stand by my belief that it’s better to owe the government at the end of the year instead of paying too much in taxes throughout the year. I’d rather let my money work and grow in the stock market than giving it to the government to make money off of me. I’d gladly take the hit during tax season and have more during the year. Just my 2 cents!

  5. Lee

    I have gotten back a very substantial refund for the last three years, in fact all my withholding each year. This is because I am a salaried employee of a food company and earn over 100k per year and my husband has a construction company and has substantial deductions that offset my earnings. I would like to claim “exempt” so I wouldn’t have any withholding taken out since I have gotten it back in a refund. Our financial situation is not going to change for the forseeable future as his construction business is slowly recovering. Can I claim exempt and not get in trouble with the IRS?

  6. Derrik Hubbard, CFP


    Well written.

    I think you summarize the issues well, and give a good rationale for maintaining the proper tax withholdings.

    Also, in people’s W-4, if they are having a hard time getting the right w/h, they can use the additional fixed amount per pay period option on the form.

  7. Johnlyn

    I’ve always heard that you shouldn’t claim more than 9 on your W-4 or you may be audited.

    We’re getting $2500 back this year and when I look ahead, we’ll be getting more back next year. Getting a big refund like this drives me crazy!!!

    I’m afraid to put down more than 9 exemptions. Is it true that if you put down too many exemptions it raises a red flag?


  8. kathy

    How do we calculate on what to put our status at on withholding. We always get about $3700.00 back and would like to lessen that amount and get the savings during the year. Can anyone help with that? Thanks!

  9. DreamChaser57

    Great post, I like that both sides of the coin are discussed. Just to add a different perspective. We received a sizable refund this year and typically do every year. Despite the conventional personal finance wisdom, we like it because the windfall allows us to do lots of things. For instance we were able to settle a $15K old debt for $6500. In an ideal world we would have that amount saved but we don’t. We are on track to pay off all consumer debt by the end of the year hopefully or at the latest the end of the 1st Qtr 2012. As become more fiscally mature and nuanced, I doubt we will keep our withholdings the same.

  10. Debbie

    My husband and I have been getting a hefty refund ($7k +)for the last two years. We are very cautious with our money and we currently have one year’s worth of income in savings. Quite honestly, the refund allows us to make one yearly minor home repair and pays for one semester of our son’s college tuition. For now this is a good arrangement , but as soon as we’re done helping our children pay for college or trade school, we will definitely reconsider changing our withholdings.

  11. Scott L.

    Okay, did the adjustment thing a couple of years ago & am still receiving large refunds, this year around $2000. When I made the last adjustment, I think I raised it to 12 exemptions, which is for a family of 4 with one income. I don’t have our federal return in front of me, but I always itemize & this year our deductions were around $13,000 on an AJI of approx. $42K. And to top it off, I had no federal tax withheld in ’10. Am I due for a big surprise in the future for getting such a big refund?!?

  12. Scarlet

    I will definitely be adjusting my withholding. Apparently my husband and I aren’t getting enough taxes taken out of our checks and we are ending up owing federal. We own a home but have no children. Apparently our only tax break would be if we had children. Sorry. I’m not having a kid just to get a tax break once a year. So yes, I’ll definitely be adjusting my withholding as well as my hubby.

  13. Sydney, BillCutterz

    One thing I like to do with my big tax refund is pre-pay my car note. I put the refund in a separate checking account that my car payment is auto-debited from each month. You could also do this with your home or auto insurance and get an extra discount if your company provides one for paying your premiums up front.

    I’ve used this method for the past three years and it’s working really well for me and my husband. We had a hard time not spending the extra money after paying all of our bills and instead of upping our savings amount each payday, we’d go buy a new toy. Once we switched to doing this, that extra money wasn’t around for us to spend. Now it seems like our budget is tighter because our take-home pay is less, but it’s really not.

    • mikey

      Why don’t you just take the money and pay it all against the principle of your car loan instead of “prepaying” the payment (which includes interest!!)? All you are doing is freeing up extra money each month (by not having the car payment in your monthly budget, since it is prepaid) that you would be paying toward the car. Then its harder to be disciplined with how you are spending that extra money. If you put it to the principle you would knock that payment out quicker and wouldn’t have to get ripped off so bad paying all that interest. Thus getting rid of the car loan all together. Your budget needs to feel tight until you get it paid off, a car ismuch too expensive of an item that decreases in value to be paying more than it’sactually worth. Just a thought.

  14. Kaye

    For several years in a row, I had to pay in at the end of the year so when I started a new job, I had an extra $5 a week taken out. This is my second year to get a large refund so I have adjusted my W-4 to get rid of the extra a week. I would rather get the money weekly and use it wisely.

  15. William Cowie

    As long as you don’t borrow to cover monthly expenses, I think the big refund route is great. The interest you forego is pennies. (Seriously, who even notices the interest they receive on a savings account?)

    We’ve used this for years as the budget for annual expenses (repainting the house, fixing the fence, stuff like that). Besides, it’s terrific motivation to get your taxes done early, instead of procrastinating. And the tithe on the refund is a great opportunity for an annual extra gifting to someone. We tithe on the gross, so getting the refund offers the opportunity for something extra.

  16. Laraba

    My husband is our primary wage earner and we have 8 kids. He doesn’t have much taken out for federal taxes. He claims a LOT of exemptions. We still get a hefty refund. The tax system is squirrely. I think there are a fair number people like us who basically just don’t pay federal taxes. (Of course, we pay social security and property taxes and school taxes and state taxes.) I assume when our kids grow up and leave the home, we’ll start paying substantial federal tax.

  17. Jon Daley

    I once filled out the W-4 form with a 13 or 15 in the exemption box, and HR said they would have to report me to the IRS since I was over some limit, and so they encouraged me to lower the number, but I knew it was the right number (it was actually a little conservative, but I didn’t want to owe a lot at the end of the year, so had more taken out than I needed to).

    However, since I just filled out my taxes today, and have to write a large check ($10K) tomorrow, I am wondering whether I should have paid more throughout the year, as it would probably be nicer to pay that throughout the year, rather than all at once. My income greatly fluctuates from year to year, so this year’s estimated payments were based on 100% of last year’s tax, which turned out to be way less than what we owed this year. So, I don’t know – I am generally in favor of not loaning the government my money for free, but I might have to reconsider to avoid a huge payment at the end of the year.

  18. Alan

    Good post! I know a lot of people that look at it as “forced” savings but I always try and let them know that it is us an interest free loan to our rarely works however.

  19. Michelle Sweeten

    I think I’ve claimed 11 w/h on my w-4 but we still get a large return. My husband farms….. so I know that makes a difference. I wish I could adjust it more…. but I’m clueless.