Self-Imposed Tax Refund Penalty

The latest IRS statistics show that around 108 million of all 2021 Tax Returns filed through October 2022 got a tax refund and the average refund check was about $3,176. A tax refund is, most of the time, not free government money as too many taxpayers incorrectly assume!

What is a Form W-4?

How to complete a W-4?

Types of W4 Forms

W4 Tax Withholding Calculator

W-4 withholding examples

Is a Large Tax Refund a Self Imposted Penalty?

How to Estimate, Create, Complete your Form W-4?

You have 2 options to create a W-4 or estimate your tax withholding. The W4 Form Creator guides you through to just fill out a Form W-4 without additional calculations. Use the PAYucator and enter your pay-stub or paycheck information for your current or future job. This will also estimate your tax withholding and you can create your W-4 Form based on your entries. Make adjustments e.g. increase or decrease your withholding based on your tax return goal.

• Form W-4 Creator:  Create, Fill-out Form W-4: Online tool to complete, fill-out a W-4 without any additional calculations, suggestions.
• PAYucator based W-4: Create Form W-4 based on your Paycheck. Complete, adjust your paycheck and the tool will create a Form W-4 based on your paycheck results.

However, it is possible to file a tax return with a certain amount of income, filing status, and number of dependents which has $0 per paycheck IRS tax withholding and still results in a tax refund. This is mostly due to the increased and refundable Child Tax Credit and other tax credits. Review this chart to see return examples with $0 paycheck tax withholding.

W-4 Form Tax Withholding Overview

Watch this video on the importance of tax withholding planning via Form W-4.

Based on the statistics, every month, these taxpayers hand over on average about $250 of their hard-earned money to the IRS - mostly based on the form W-4 - only to get back this same money at tax return time as a tax refund based on the tax return. In other words, if a taxpayer withheld $250 in January of any given year, this taxpayer would have to wait over a year to get back this money via a tax return refund. To make matters worse, during 2020 and 2021, the IRS processed tax returns considerably slower due to the COVIC Pandemic and the processing of stimulus payments. As a result, many taxpayers waited in many cases over 18 months to get back their "oversized" paycheck tax withholding in form of a delayed tax refund. This means that most - around 66% - of all taxpayers withheld too much of their money in taxes per paycheck.

Large tax refunds may also be delayed because the IRS holds certain refunds with the Earned Income Tax Credit and Child Tax Credit. As such, your over withholding is held with these and you may not get it immediately. Additionally, the IRS delays during the COVID pandemic resulted in tax return processing delays, thus managing tax withholding is important. 

Do You Penalize Yourself Financially Through a Tax Refund?

Fact One: The tax refund money you get in tax season after you filed your tax return is made up of your own money that you gave to the IRS interest free with each paycheck as a result of your W-4 or tax withholding plan. In other words, when you get a large tax refund, this means you've overpaid taxes. Granted, the new W-4 is complicated and makes it difficult for most taxpayers to plan for paycheck-based IRS tax withholding. As a result, we at eFile.com have created tools to better plan, calculate, and create W-4 forms.

Fact Two: A tax refund is often the result of failed W-4 related financial planning. It can be, however, increased or enhanced by federal tax credits, but the bulk of a tax refund is, in most cases, your own money. We understand that the W-4 form has gotten much more complicated and this is why we have created 4 easy to use W-4 tools to help you with this! The tax refund is made up of your over-tax withholding plus refundable tax credits. Taxpayers are eligible for various tax credits, some of which may be direct payments to you that can only be claimed by filing a tax return. Not sure which tax credits you qualify for? Prepare your return with eFile.com and we will select all the credits and determine the maximum amounts you are entitled to and include them on your return. 

Don't Penalize
Yourself!

Fact Three: The W-4 (or W-4 worksheet) you completed and submitted to your employer is not equipped to help you in balancing your taxes. Instead of trying to understand complected IRS forms and language, use any of these W-4 form tools and be guided through the process. When you submit a W-4 without proper planning to your employer, the payroll department will simply use your filing status and standard deduction amount to determine how much to withhold per pay period. Generally, the amount is over-estimated which results in a tax refund as one W-4 does not take other important factors into consideration. A tax refund is a free loan you give the IRS only to get it back with interest as a tax refund!

Consider this example:

• Let's say you receive a $2,400 tax refund after you submitted your tax return. On average, you are asking your employer to withhold $200 in too much tax withholding each month (or $100 each biweekly pay period). Since we don't know your tax specifics, simply adjust your W-4 and reduce the dollar amount withheld per paycheck and see how much your tax withholding changes on your next paycheck. If it did not reduce it by $200 in this case, consider reducing more until you are balanced.
• In comparison, you could use this money to pay off $2,400 in credit card debt at 18% per year interest in 12 months. As a result, the $200/month would have worked for you instead of the IRS. If you do not pursue this strategy, you would effectively penalize yourself at 18% per year.
• Tax withholding is dependent on the specific tax situation. The general idea here is to reduce your paycheck withholding so that you are as close to balanced as possible without owing. You may consider the inclusion of tax credits you may be eligible for, but it is best to look at your income and withholding separately. Tax credits are included as you prepare your return and are subject to changes each year with the tax code. For example, you may qualify for the Earned Income Tax Credit one year, but, due to a pay raise, you may no longer qualify next year. As such, you would not want to consider this amount when figuring your taxes for the following year.

How to Balance A Tax Refund?

Tip: Completing a W-4 without planning out your next tax refund (or at least base it on your previous tax return) is a bit like driving a car looking only at the rear-view mirror. Estimate your next tax return results and create your W-4 all at the same time! Stop tax penalizing yourself and keep your hard-earned money during the year. We recommend you review, assess, and take action with these steps:

1. Estimate your next tax return before you plan out your W-4.
2. What is the W-4 and tax withholding?
3. Did you claim all your tax refunds over time?
4. Use one of these W-4 tools and get sowing!

Need more help in self tax penalty prevention? Contact an eFile.com Taxgeek to discuss your tax planning strategy.

Fail to Plan is Plan to Fail - don't let that happen to you! View a list of stupid and smart things to consider when preparing a tax return. During the year, it may be beneficial to start thinking about your tax return even if the filing date may seem far away. See ways to save money during the year as well as some tips to save you money on your taxes.

Why stress over IT? IT = Income Taxes and we make IT easy for you! On eFile.com, you can answer simple tax questions, enter figures from the tax forms you receive, and the eFile Tax App will report all your information on the proper forms with 100% accurate amounts. e-filing is secure, quick, and saves you the hassle of filling out forms and mailing them to various tax agencies.

After all this tax-stress, relax and listen to the eFile Song and sign up to TaxWin.

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