The Tax Refund Cometh
Pets aren't dependents though, sorry
Maybe people wouldn’t mind taxes so much if everyone at the Internal Revenue Service was as attractive as young Brad there. But one thing most people are happy to learn when they file their annual tax return is that they are getting a refund. For myself, not so much. Getting a refund means I just gave the IRS a 12-month interest-free loan. I’d rather keep that money every couple of weeks for me.
One the other hand, I had a client reach out today to complain that she and her husband will owe the IRS a rather sizeable amount next month. How does this happen?
A few years ago, the IRS introduced an updated W4 form for calculating how much federal income tax should be withheld from your employee paycheck. When the form is filled out correctly, you will have just the right amount of income tax withheld from each paycheck so that you will not owe any tax, nor will you receive a refund.
As you are getting ready to file 2025 taxes, it’s also a good time to do a little tax planning for the current year. Whether you are getting tax bill or a refund come April 15th, check your withholding and make any necessary adjustments. Your filing status influences how much tax is withheld, so if you had a change in marital status since last year, be sure to update your W4.
If you have a second job or some other source of income, use the IRS worksheet to take any additional income into account so that more tax is withheld. Most people owe the least amount of tax by claiming the standard deduction, but if you expect to claim other deductions, such as medical expenses, you can use the worksheet for that as well.
Do you have any dependents? Dependents don’t necessarily have to be your children. An adult relative can qualify, as can an unrelated adult who lives with you all year. Their gross income must be below the threshold specified by the IRS, and you must provide more than half of their financial support. The more dependents you include on the form, the less tax will be withheld from your paycheck. Sorry, pets don’t qualify even though you provide all of their financial support and yet they still refuse to get a side hustle.
Finally, you can also indicate that you want a defined amount withheld from every paycheck. Some people like to do this because they prefer getting a refund as a lump sum, almost as a kind of forced saving. So far this year, the average refund is $1928.
While I prefer to keep more money in my pocket during the year instead of getting a big refund, neither choice is necessarily better than the other. It’s really a matter of personal preference, what your monthly cash flow looks like, and what works for you in terms of saving.
What to do if you owe money to the IRS
If you are hit with a surprise tax bill, you have a couple of options. If you can pay it without having ramen dinner every night for months, great. If it’s not too big, just a bit more than you thought it would be, consider a 0% balance transfer. There will probably be a 3% to 5% fee, but you can spread out the payments over 12-18 months. Check Bankrate or Nerdwallet to see what offers are currently available. Definitely update your W4 so you don’t have the same issue next year.
If the bill is so big that you have no realistic way to pay it by the April 15th deadline, the IRS offers its own payment plans, and will even settle your tax bill for less than the full amount. Here is a full description of all their options.
What to do if you’re getting a refund
What I do like to encourage people to think about when they are anticipating a refund is to decide in advance how they want to allocate it. You can decide on dollar amounts or percentages.
A tax refund is a windfall that can be used to jumpstart a savings account and pay down a chunk of any high-interest debt. You can prioritize one or choose to do both. I also like to see people keep something to spend on making life more enjoyable now.
And speaking of enjoyable, here’s the full clip where Death reveals his true identity in the movie Meet Joe Black—be sure to double click. It’s an interesting movie that got mixed critical reviews. But it has the most haunting, yearning, and bittersweet Thomas Newman score. Newman also wrote the evocative theme music for the opening sequence of Six Feet Under too, which has the best television series finale ever. I will die on that hill.
Watch Anthony Hopkin’s face.
Are you team refund or team more money all year long? Let me know in the comments.
I prefer to be team perfectly even, however, lately I have been team owe. Not fun. This year I think I might be team refund if the no taxes on tips thing works out for me. What I kinda would like to do if I do get a refund is sock it all Into a 401(k) in order to get even more of a refund which I would then sock into the same 401(k). I’m very stupid in these matters though so I really don’t know what’s gonna happen.
On paper, keeping more money during the year is the better answer. In real life, a lot of people spend what flows through the paycheck and only manage to save what arrives later as a refund. So the refund ends up working less like a tax outcome and more like forced discipline.
That is why neither side is automatically right. The real problem is not getting a refund or owing a little. The real problem is being surprised in April because the withholding never matched the reality of the household income.
Most people do not have a tax problem. They have a planning problem.