A lot of people seem to treat tax refunds like free money, but in reality, it’s just the government returning your own money after a year-long, interest-free loan.
As we enter 2026, with inflation still a factor and high-yield savings accounts actually yielding something, withholding too much on your paychecks is costing you money. If you’d rather have extra cash in your monthly paycheck to crush debt or invest, it’s time to stop overpaying Uncle Sam and take control of your Form W-4.
Why a Large Tax Refund Means You’re Over-Withholding
Every time you make money at your job, you’ll likely owe income taxes on it.
The amount of federal income tax that should be deducted from each paycheck is determined by your employer using your W-4. Since you effectively gave the government an interest-free loan, you will get a sizable refund if too much is taken out.
The IRS advised taxpayers to periodically review their withholding, especially following big life changes such as marriage, having a child or taking on a side job. The objective is for your withholding to be as close as possible to your actual tax liability.
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The IRS stated that employees can adjust withholding anytime by submitting a new W-4 to their employer.
“Reducing the amount of withholding tax on Form W-4 is one way to help lower a refund,” said Kristine Stevenson Seale, IRS enrolled agent (EA) and founder of Proverbs 16:16. “This means more money is available in each paycheck to pay bills, pay down debt or save for a large future purchase such as a car or family vacation.”
Adjustments You Can Make To Reduce Your Refund
To lower your refund next year, you generally need to reduce the amount being withheld. Here are the most important parts of the form below.
| W-4 Section | What It’s Asking For | How It Affects Your Refund |
|
Step 1: Filing Status |
Are you taxed as single, married, etc.? | Picking the wrong option can cause too much tax to come out of your paycheck. |
| Step 3: Dependents | Do you have children or other dependents? | Claiming dependents usually means less withholding and a smaller refund. |
|
Step 4(a): Other Income |
Do you have income from side jobs or investments? | If this income isn’t taxed now, adding it helps prevent owing later. |
| Step 4(b): Deductions | Any itemized deductions? | More deductions can reduce how much tax is withheld. |
| Step 4(c): Extra Withholding | Do you want extra tax to be taken out? | If you add too much here, you may end up with an unnecessarily large refund. |
Because many people leave unnecessary withholding in place, pay special attention to Step 4(c) if you want a smaller refund.
You Should Use the IRS Tax Withholding Estimator
Using the official IRS Tax Withholding Estimator is the easiest way to make changes to your W-4.
And any uncertainty you may have about underpaying, which could result in fines, can be alleviated by using the estimator’s recommendations. It helps you determine how much to withhold based on your household situation, income, credits and deductions.
However, if you want an alternative to the IRS calculator, there are options.
“Hidden inside IRS Publication 505, Tax Withholding and Estimated Tax, are a series of five worksheets that can be used in lieu of the withholding tax calculator on the IRS website, which has mixed reviews on it’s availability and accuracy,” said Stevenson Seale. “Specifically, Worksheet 1-5 is used to decrease withholding.”
Avoid Penalties
The main concern when reducing a refund is receiving an unexpected bill or, worse, a penalty. Generally speaking, you must comply with the “Safe Harbor” regulations to stay safe. If you pay at least 90% of your current year’s tax or 100% of the tax shown on your previous year’s return (110% if your adjusted gross income [AGI] is over $150,000), the IRS usually won’t penalize you for 2026.
If this is your first time making changes, proceed cautiously and start with smaller portions of your refund rather than the entire amount.
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This article originally appeared on GOBankingRates.com: How To Adjust Your W-4 To Lower Your Tax Refund Next Year
