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Reducing Your Tax Refund

by Kevin McKinley - April 5th, 2015

Posted Under: economics & policy

If you’re like most taxpayers, you are anxiously (or excitedly) anticipating a refund on the state and/or federal taxes you overpaid during 2014.

The IRS says that nearly eight out of ten filers are going to receive at least a refund on their federal tax returns, for an average amount of about $2,800.

But it may not be in your best interests to pay in too much in taxes sooner, only to receive your own money back later. Here are some reasons you may want to rethink receiving a refund, and what to do if you want to hang on to your money as long as possible.

There may be a better use for the money

When the state or federal government receives your money, you’ve lost access to it until they send it back to you. If you’re already financially independent, that might not be that big of a deal.

However, if you would have withheld less during the year, you could have used that money in other ways while waiting to see what (if anything) you end up owing.

First, the funds could pay for expenses that instead had to be charged on a credit card, thereby incurring interest costs and diminishing your credit score.

Or it could have been used to pay off higher-interest debt, saving you interest and boosting your credit score.

Finally, if you’re a worker, you could have used it to defer more money in to a pre-tax retirement plan at work, thereby further reducing your eventual tax bill.

And who knows—maybe that extra money invested could have actually made you more money. Especially since the state and federal governments don’t pay you for the privilege of using your funds while you wait for a refund.

Your return could receive more scrutiny

As both of the regular readers of this column no doubt know, crooks have increasingly used personal information stolen from others to file false tax returns, using made-up figures to claim a refund from the state or federal revenue departments.

In an effort to combat this fraud, the Wisconsin Department of Revenue and the IRS have started holding up returns that appear to generate a refund, possibly subjecting the filer to an identity-verification process before sending out the refund.

So even if your filing is legitimate, you may have to endure a longer wait and hassle to receive your money, compared to what you would have to go through if you just paid in what you owed by April 15th.

How to have less withheld

Whether you’re working or retired, there is a way to have less money withheld from your income, and increase what ends up in your bank account.

Employees can elect to have more exemptions added to their W-4 form, thereby decreasing the amount withheld. The IRS provides a handy calculator you can use at, and since you’ll need some information from your tax return to use the calculator, there’s no time like tax season to get this done.

The makers of TurboTax have developed a chart that can you can use to determine how many exemptions you have, based on the size of your current refund and your income range. Visit to get an estimate that fits your particular situation.

Retirees usually can elect to reduce the amount of state and federal income taxes withheld from Social Security, pension, and IRA distribution payments by contacting the organizations that issue those respective checks.

Not for everybody

Of course, it’s not always appropriate to make the state and federal revenue departments wait as long as possible to receive what you owe. In some cases, not paying enough soon enough can cost you money in the form of extra taxes or penalties.

So next week we’ll tell you when it’s a good idea to pay more in taxes during the year, and how to go about it.