Adjusting your W-4 to boost your tax refund may seem like a beneficial strategy, but it’s often not the financially optimal choice. The IRS Form W-4 is used to determine the amount of federal income tax to be withheld from your paycheck. If you end up with a large refund, it means you’ve given the government a no-interest loan throughout the year.

To modify your W-4 for a bigger refund, you would increase your withholding. This means fewer take-home dollars each pay period, but a larger lump sum when you file your taxes. To do this:

1. Decrease the number of allowances: Previously, adding more allowances would lead to less tax withheld. Since the 2020 form redesign, this involves adjusting credits and deductions.

2. Request additional withholding: You can specify an extra amount of money to withhold from each paycheck on the redesigned form.

However, there are several reasons why you might not want to manipulate your W-4 this way:

– Lost investment potential: Money earned earlier has more time to grow through investments.

– Reduced liquidity: By overpaying taxes, you reduce your monthly budget which could impact day-to-day financial decisions and emergency funds.

– Tax law changes: If tax laws change throughout the year, it may affect the expected outcome of tweaking your W-4.

Instead of altering your W-4 for a bigger refund, consider these alternatives:

– Tailor withholding to match liability: Attempting to precisely match your withholding with your actual tax liability ensures you neither owe significantly at year’s end nor overpay throughout the year.

– Investment: Use extra income per paycheck for investments or high-yield savings accounts.

– Pay down debt: Applying extra funds to high-interest debt can save money in the long run.

Ultimately, tweaking your W-4 for a bigger refund isn’t always advantageous. Consider consulting with a financial planner or using online calculators to better understand your federal income tax situation before making adjustments.