Disappointing Tax Refund? It May Be Time to Update Your W-4

The following is presented for informational purposes and is not intended as tax or legal advice.

Tax time can be exciting for some families. That's because many Americans expect to receive a nice refund around this time of year. That refund may even be a crucial part of their financial plan. 

But what if you don't get the refund you expected? Or worse, what if you actually owe money this time around?

A smaller refund doesn’t necessarily mean you paid more in taxes for the year. You could actually pay less income tax and wind up with a smaller refund depending on how much money is withheld from your paychecks throughout the year. However, it can still be disappointing if you were planning on a large refund.

If you’d like to change your refund for next year, you may want to update your Form W-4s with your employers.

What is the Form W-4?

Form W-4 is the tax form that you submit when you start a new job as an employee. You can update it at any time by giving your employer a new Form W-4.

Employers use your Form W-4 and income to help determine how much money to withhold from your paychecks and send to the IRS.

• If you want a larger refund, you may want to claim fewer allowances or ask your employer to withhold more money from each paycheck.
• If you want a smaller refund, you may want to claim more allowances and make sure you aren’t having additional money withheld.

The IRS has a withholding calculator you can use to check your withholdings. It doesn’t work for every situation, but it’s a great resource if you’re looking for help while updating or filling out a new Form W-4.

Reviewing and updating your Form W-4s

The part of the Form W-4 that you fill out only takes up a third of a page, and most of that is just your name, address, and Social Security number. However, filling out the Form W-4 can still be confusing, especially if you have more than one job or both you and your spouse work.

There are seven boxes that you’ll want to review when filling out a Form W-4. A few of these (boxes one, two, and four) are for your identifying and contact information and should be easy to understand and fill out.

Box Three

Box three asks if you’re single, married, or married and file your tax return with the married filing single status. Your filing status can impact your tax situation, so marking the correct box is important.

After boxes one through four, skip ahead to box seven, which asks if you’re exempt from withholdings.

Some employees don’t need to have any money taken out of their paychecks because they know they won’t owe any federal income tax by the end of the year. These employees can write “exempt” in box seven and then skip boxes five and six.

To qualify as exempt you need to meet two criteria:

• You didn’t have any federal income tax liability last year, and all the federal income tax you paid was refunded when you filed your tax return.
• You don’t expect to owe any federal income tax this year.

For example, if you’re single and no one else can claim you as a dependent, you won’t owe any federal income tax if you make less than $12,000 – the standard deduction for a single taxpayer.

If you’re not exempt, go back to boxes five and six.

Box Five

Box five may be the most important, and most confusing, on the Form W-4 – it’s where you’ll put your number of allowances.

• Allowances correspond with situations when you’re eligible for tax credits or deductions.
• Each allowance you claim will lead your employer to take less money out of your paycheck.
• A single taxpayer who doesn’t qualify for any tax credits will only claim one allowance.
• Claiming more allowances could lead to a smaller refund (or owing more money) when you file your tax return.

There are two worksheets on page three of the Form W-4 that you can work through to determine how many allowances to claim.

If you have more than one job or both you and your spouse work, then you’ll need to fill out a Form W-4 for each your employers. You should use the two-earners/multiple jobs worksheet on page four to figure out your total number of allowances.

• Claim all your allowances on the Form W-4 for your highest-paying job, or the highest-paying job between you and your spouse. Claim zero allowances on all the other Form W-4s.

Box Six

Box six allows you to have a specific amount of money withheld from each paycheck. You may want to do this if you have other forms of income, such as contract work, dividends, or long-term capital gains that you receive without any money being withheld.

If you don’t withhold enough and owe $1,000 or more when you file your tax return, you may have to also pay a penalty and interest. So, it could be a good idea to have money withheld from your paychecks. Alternatively, you could make estimated tax payments throughout the year.

Is a larger refund better?

While getting a large refund can be nice, it isn’t everyone’s desired outcome. Some people prefer to receive more money each paycheck and have as small a refund as possible. Others prefer a larger refund, even if it means not having as much money throughout the year.

Whichever outcome you prefer, your Form W-4s could be the key to how much you’ll have to pay or get back. Don’t forget to check your forms, and update them after major life events, such as getting married, divorced, having a child, or starting a new job.

Small refund throw your finances into chaos? Work with a trained financial counselor and learn how to make the most of your money. Counseling is free and available 24/7, online and over the phone.