Federal Tax Withholding–Refund Zero!

We have a fun game we like to play with our own personal tax returns. It’s called Refund Zero! The idea is to try to set our federal tax withholding so accurately that when we file our personal tax return, we end up with a refund as close to $0 as possible. To date, no one has done it–although we know one person whose refund this year was less than $5!

Most employees withhold federal income tax from every paycheck. Some even withhold extra because 1) they don’t like owing tax at the end of the year, or 2) they like getting a big fat refund to splurge with.

It’s an unfortunate misconception that tax refunds are the IRS’s way of giving away free money. While that can be true in certain circumstances (refundable tax credits, for example), it’s generally more accurate to say that the IRS is simply returning our money to us. It’s therefore important to note that most refunds are simply getting back money that was originally withheld from your hard-earned wages rather than a windfall of unearned revenue. It’s like a forced savings account, but without the interest!

In either case, though, it’s important to try to accurately predict how much you should withhold. And the IRS offers a tool to help.

We strongly encourage you to check the accuracy of your withholding amounts by using the Tax Withholding Estimator on IRS.gov. The magnitude of the changes to reported income resulting from recent tax law changes may surprise you. Don’t be caught unaware! You can then use the results to help you complete a new Form W-4 and adjust your income tax withholding with your employer. This will help you make sure your employer is withholding the right amount of tax from your paychecks. (You can read the IRS’s “Tax Tip” on adjusting your W-4 here.)

Aiming for Refund Zero can help prevent under-withholding and avoid a large and unexpected payment due (as well as possible penalties) when you file your taxes next year. It can also help prevent over-withholding and giving Uncle Sam a large interest-free loan of your hard-earned wages.

By the way, if you are getting a refund this year and want to know the status of your refund, you can find a tool for that here!

For next year’s refund, try out this new withholding estimator. Let us know next year how it worked! If you manage to get your refund (or tax due) to less than $100 next year, let us know! There might even be a special Refund Zero prize!

Happy calculating!