University of Missouri Extension

Anticipating a Tax Refund? Don't Celebrate

The IRS reports Federal tax refunds to individuals totaled more than $202 billion last year. Nearly 100 million taxpayers got refunds (3 out of 4 returns). The average refund was slightly more than $2,000.
            A tax refund isn’t as much cause for celebration as many think. A refund means that you paid too much in taxes during the year. In case you didn’t notice, Uncle Sam didn’t pay any interest back while he held your extra money either. Although a lot of people consider a refund “found” money or a forced savings plan, if you get a tax refund, you are giving the government an interest-free loan.
            A tax refund is money you earned and could have access to throughout the year instead. For example, say you receive a $2000 refund. If you adjust your withholding, you could have an extra $166.66 each month available to you to spend, start an emergency fund, invest, or use to pay down debt.
            A rule of thumb is that if you received a refund over $500 or owed more than 10% of your total tax bill, you should adjust your withholding. For most taxpayers, this can be adjusted by modifying the number of allowances claimed on your W-4 (the form you file with your employer when you begin employment). You can change your number of allowances (altering the amount of taxes withheld from your paycheck) at any time. The more allowances you claim, the less tax is withheld. Your goal is to have withheld at least 90 percent of what you think you’ll owe for a year.
            There are 3 steps to follow to adjust your withholding:
            STEP 1 – Anticipate changes.  Anything that lowers your tax bill (tax credits, exemptions, deductions, etc.) can be considered in your allowance calculation. Did you get married? Divorced? Have a child? Purchase a new home? Refinance a current mortgage? Earn more/less money than last year? Begin paying on your student loans? Capital losses? Ask yourself questions that will determine whether it makes sense to alter your allowances even if you didn’t get a large refund because your situation may be different this coming year.
STEP 2 – Use a withholding calculator.  The simplest way to check the “accuracy” of your number of withholdings is by accessing the Missouri Department of Revenue’s online withholding calculator at Employees can use it to do tax planning and project future withholdings and changes to their Missouri and/or Federal W-4. Another option is to get IRS Publication 919 How Do I Adjust My Tax Withholding? at It contains the necessary worksheets and instructions.
            STEP 3 – Take action.  If altering your W-4 would be beneficial, do it!  Simply download a new W-4 (, fill it out and turn it into your human resource office.

            For more information about saving, investing, or paying down debt, visit Missouri Saves.

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