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TAXES How to Adjust Your W-4 Tax Withholding to Get the Ri... 2026-02-27 · 5 min read · W-4 · tax withholding · taxes

How to Adjust Your W-4 Tax Withholding to Get the Right Refund

taxes 2026-02-27 · 5 min read W-4 tax withholding taxes tax refund

Most people treat their tax refund as a windfall — a bonus that arrives every spring. The reality is less exciting: a large refund means you overpaid the government throughout the year and are receiving your own money back, without interest.

Conversely, owing a large amount at tax time means you underpaid — which carries the risk of underpayment penalties from the IRS.

The goal is accurate withholding: paying approximately the right amount throughout the year, getting a small refund (or owing a small amount), and keeping your money working for you the rest of the time. Here's how to achieve it.

How Tax Withholding Works

When you earn income as an employee, your employer withholds federal income taxes from each paycheck based on the instructions you provide on Form W-4. Those withheld taxes are sent to the IRS on your behalf throughout the year.

At tax filing time, you calculate your actual tax liability and compare it to what was withheld. If you withheld too much, you get a refund. If you withheld too little, you owe the difference.

The problem: most people set their W-4 once at a new job and never revisit it — even as their financial situation changes significantly.

Understanding the New W-4 (2020 and Later)

The W-4 was redesigned in 2020 and no longer uses "allowances" — a simpler but confusing system. The current form uses dollar amounts and has five steps:

Step 1: Personal information (name, address, SSN, filing status)

Step 2: Multiple jobs or spouse works (complete if applicable — important for avoiding underwithholding)

Step 3: Claim dependents (enter dollar amounts for the Child Tax Credit and other credits)

Step 4: Other adjustments

Step 5: Signature

For many employees with a single job and no complicated situations, completing Step 1 and Step 5 and leaving everything else blank results in reasonable withholding. But specific situations require more attention.

Common Situations That Require W-4 Adjustments

Multiple jobs / dual-income households: If you and your spouse both work, or you have two jobs, each employer withholds as if you're only working that one job. The combined effect may leave you significantly underwithholding because you're in a higher combined bracket than either employer assumes. Use the IRS's Tax Withholding Estimator or complete the Multiple Jobs Worksheet on the W-4 to correct this.

Large annual tax refund: If you consistently receive $2,000-$5,000+ refunds, you're overwithholding. That money could be in your savings account earning 4-5% interest instead of sitting interest-free with the IRS. Increase your exemptions or adjust Step 3/Step 4(b) to reduce withholding.

Significant side income or freelance work: Income not subject to withholding (1099 income, rental income, investment income) increases your tax liability without any withholding to match it. Use Step 4(a) to report this additional income, or pay quarterly estimated taxes separately.

Major life events: Marriage, divorce, having a child, buying a home, a significant pay change, or reaching Medicare age all affect your tax liability. After any of these events, revisit your W-4.

Prior year owed taxes: If you owed money at tax time last year, adjust your withholding upward. Use Step 4(c) to add a specific additional dollar amount withheld per paycheck.

Using the IRS Tax Withholding Estimator

The most accurate way to calibrate your withholding is the IRS's free Tax Withholding Estimator at irs.gov/W4App. You'll need:

The tool calculates your estimated tax liability and tells you exactly how much to withhold per paycheck to hit the right target. It takes about 15 minutes.

Calculating It Manually: A Simplified Approach

If you prefer a rougher calculation without the estimator:

  1. Estimate your gross income for the year from all sources
  2. Subtract the standard deduction (2026: $15,000 single, $30,000 married filing jointly)
  3. Subtract above-the-line deductions (IRA contributions, student loan interest, HSA contributions, 401k contributions)
  4. Apply the tax bracket table to the result to estimate federal tax owed
  5. Subtract expected tax credits (Child Tax Credit, Child and Dependent Care Credit, etc.)
  6. Divide by your remaining pay periods to find desired withholding per check
  7. Compare to what your employer is currently withholding (from recent pay stub)
  8. Adjust your W-4 to get closer to your target

This calculation doesn't need to be perfect — you're aiming to be within $500-$1,000 of your actual liability, not exact.

How to Submit an Updated W-4

You can update your W-4 at any time — you don't have to wait for a new job or open enrollment. The process:

  1. Download the current Form W-4 from irs.gov (or your HR system may have it)
  2. Complete the form with your updated information
  3. Submit to your employer's HR or payroll department
  4. The new withholding typically takes effect within 1-2 pay periods

You can update your W-4 as many times as you want throughout the year.

State Tax Withholding: Don't Forget This

Most states with an income tax have their own withholding form, which works similarly to the federal W-4. The state form is often called:

If you adjusted your federal W-4 to reduce over-withholding, review your state withholding too — states have different brackets and rules.

The Refund Tradeoff: Is a Small Refund Actually Better?

The financial argument for not overwithholding is real: money withheld early in the year could be earning interest in a HYSA at 4-5% APY. On $3,000 in excess withholding for 6 months at 4.5%, that's roughly $67.50 in lost interest. Not life-changing, but real money.

The behavioral argument for modest overwithholding: many people value the forced savings aspect of a tax refund. If the alternative is spending the $250/month rather than saving it, the refund serves a useful purpose.

The right answer depends on your financial discipline and situation. What's not worth doing is having a $5,000+ refund year after year — at that level, the interest cost and the "interest-free loan to the IRS" reality add up to meaningful lost opportunity.

Aim for a refund of $0-$500 or an amount owed of $0-$500. Within that range, you're well-calibrated. Outside of it — particularly if owing triggers anxiety or if your refund is consistently $2,000+ — adjusting your W-4 is worth the 15-minute effort.