Why You Should Consider Adjusting Your Withholdings for a Bigger Refund

27 August 2025

We all love that feeling of getting a hefty tax refund. It’s like stumbling upon forgotten cash in an old jacket—except way better. But what if I told you that you might be leaving money on the table by not adjusting your withholdings?

Yep, that paycheck you bring home every two weeks could be bigger if you just tweaked a few tax settings. And in the long run, that could mean more money in your pocket or even a chunkier refund at tax time. Let’s dive into why and how adjusting your withholdings could work in your favor!

What Are Tax Withholdings Anyway?

Before we jump into the "why," let’s get clear on the "what."

Tax withholdings are the portion of your paycheck that your employer sends directly to the IRS on your behalf. Think of it as a "pay-as-you-go" system for your taxes.

The amount taken out depends on the details you provide on your W-4 form. If too much is withheld, you get a tax refund. If too little is withheld, you might owe taxes when you file.

At first glance, getting a refund sounds great, right? But here’s the catch—it essentially means you’ve been giving the IRS an interest-free loan throughout the year. And let’s be honest, they don’t return the favor!

The Downsides of Over-Withholding

If you're getting a large refund every year, it might feel like a bonus check, but here's why that might not be as great as it seems.

1. You're Giving the IRS a Free Loan

Would you lend a friend a few hundred (or even thousand) dollars for a year without expecting interest? Probably not. But when you over-withhold, that’s exactly what you’re doing with your own hard-earned money.

Instead, that extra cash could be working for you—earning interest in a savings account, paying down debt, or even investing for future gains.

2. You Could Use That Money Now

Life happens. Unexpected expenses pop up, and waiting until tax season to get your own money back isn’t always ideal.

Adjusting your withholdings means having more money in each paycheck, which can help with:
- Covering monthly expenses
- Paying off high-interest debt
- Building an emergency fund

Wouldn’t it be nice to have that cash when you actually need it instead of waiting for the IRS to return it months later?

3. You're Missing Out on Financial Growth

If you’re getting a $3,000 refund each year, that means you’ve been overpaying about $250 per month in taxes. Imagine putting that money into a high-yield savings account or investing it in the stock market instead.

Over time, that extra money could grow significantly through compound interest, meaning you’re not just keeping more of your paycheck but actually making your money work for you.

When Adjusting Your Withholdings Makes Sense

Now, I’m not saying you should aim for zero refund or risk underpaying and owing money at the end of the year. The key is balance—ensuring enough is withheld so you won’t get hit with a tax bill, but not so much that you’re overpaying.

Here are some situations when adjusting your withholdings might be a good idea:

1. You Consistently Get Large Refunds

If you regularly receive a refund of a few thousand dollars, that’s a sign you might be over-withholding. A quick check of your W-4 could help you keep more of your paycheck throughout the year.

2. Your Financial Needs Have Changed

Got a new mortgage? Had a baby? Started paying off student loans? Life changes can impact how much tax you really need to have withheld. Adjusting your withholdings ensures you’re keeping your tax payments aligned with your new reality.

3. Your Income Has Increased or Decreased

If you got a raise, switched jobs, or started a side hustle, your tax situation might have shifted. Tweaking your W-4 helps prevent surprise tax bills or unnecessary overpayments.

How to Adjust Your Withholdings

Ready to stop giving Uncle Sam an interest-free loan? Here’s how to get started:

1. Review Your Previous Tax Returns

Look at your last couple of tax returns to see if you consistently get a big refund. If so, that’s a clear sign you need to adjust your withholdings.

2. Use the IRS Withholding Calculator

The IRS offers a free Tax Withholding Estimator that helps you figure out the right amount to withhold based on your current financial situation. It only takes a few minutes and can provide clarity on what changes to make.

3. Update Your W-4 Form

Your employer uses your W-4 to determine how much tax to withhold from your paycheck. If you need to make a change, simply request a new W-4 from your HR department or download it from the IRS website, fill it out, and submit it to your employer.

4. Monitor Your Paychecks & Taxes

Once you’ve adjusted your withholdings, keep an eye on your paychecks and tax situation throughout the year. If you’re still getting a huge refund or (worse) owe a large amount, you may need to tweak your W-4 again.

Should You Always Adjust for a Bigger Refund?

Not necessarily. Some people actually prefer getting a big refund because it forces them to save money they might otherwise spend. If that’s you, and you enjoy the feeling of a lump sum at tax time, then sticking with higher withholdings might work.

However, if you’d rather have more control over your money throughout the year, adjusting your withholdings is a smart financial move.

The Bottom Line

Adjusting your tax withholdings isn’t a one-size-fits-all decision. But if you’re getting large refunds year after year, it may be time to rethink your approach.

By making a small change to your W-4, you could have extra cash in your pocket every month—money you can use for savings, debt repayment, or even just enjoying life a little more while still ensuring you won’t owe at tax time.

At the end of the day, it’s your money—why not keep more of it when you actually need it?