Here's Why You Should Want a Smaller Tax Refund -- and How You Can Get One

Tax refunds are the prize at the end of the tedious tax-filing process, and you're not alone in wanting the largest refund possible. The average refund this tax season stands at $1,741 as of Feb. 9. But there are those who get more and others who get a lot less.

A smaller check might seem disappointing, but it has a major upside. Here's what you need to know to shrink your tax refund for next year.

Remember, it's your money

A tax refund is money you paid to the government throughout the year that exceeded your actual tax liability. For most people, it's withheld from your paychecks automatically so you don't have to set it aside on your own. However, self-employed people may have to send in estimated tax payments themselves.

Some may consider a refund better than a tax bill. But it effectively means you gave the government an interest-free loan for months. Had your tax liability been greater than or equal to the amount you paid during the year, you could've had that money sooner, possibly months earlier.

You would've been free to spend it on anything you wanted -- debt repayment, professional certifications, or even something fun. But instead you had to wait.

You may not care, but if you dislike the idea of the IRS holding onto cash it hasn't earned yet, you might want to adjust your tax withholding. It won't help you for your 2023 tax return, but it could make a difference starting next year.

How to adjust your tax withholding

Adjusting your tax withholding is pretty easy: You just file a new Form W-4 and submit it to your employer. But before you can do that, you need to work out how much you want withheld. If you withhold too little, you'll lose less of your paychecks during the year, but you could wind up with a surprise bill next tax season. Withhold too much and you'll have more than necessary held back from your paychecks.

The IRS has a Tax Withholding Calculator that can help you estimate how much you should have taken out of each paycheck. You'll need copies of your pay stubs and your spouse's too, if you're married. You'll also want your most recent tax return and the details of any investment or self-employment income. If you haven't filed your 2023 tax return yet, you can grab your 2022 return from the tax-filing software you used last year.

This calculator isn't for those with nonresident alien status or those with complex tax situations. These individuals are better off consulting a tax professional to determine what their tax withholding should be.

It's a good idea to review your tax withholding whenever you experience a major life change, like:

• Getting a new job
• Getting a raise
• Getting married
• Having or adopting children
• Buying a home

You may also want to review the results of your adjustment at the end of the year to see how it's working for you. If you feel it still needs tweaking, you can always change it again.

It can take a couple of weeks for a tax withholding change to go into effect. Talk with your company's HR department to learn when you can expect the update to occur and reach back out if it doesn't happen within a couple of weeks after filing your new W-4. Once it does, you'll be a step closer to earning more of your income during the year -- and receiving a smaller tax refund.