Many people treat their tax refund as a bonus check, eagerly anticipating its arrival. But should a large tax refund be your goal, or is it merely an interest-free loan you’ve extended to the IRS all year?
Recently, my son asked for advice on preparing his 2024 tax return. He was eager to file early in hopes of a substantial refund, especially after owing a small amount last year due to his earnings at a local restaurant and the way his tips were reported. In 2024, he transitioned to a full-time role with ample overtime, sparking a crucial discussion about tax withholding that I believe is beneficial for everyone.
Understanding tax withholding is essential—especially if you have multiple income sources, receive military benefits, or are navigating a career transition.
What Is Tax Withholding?
Each paycheck, your employer deducts a portion of your earnings for taxes based on the W-4 form you’ve provided. Over-withholding leads to a refund, while under-withholding could result in owing taxes at filing time. The ideal strategy is to balance withholdings to retain more income throughout the year rather than receiving it as a lump sum during tax season.
The Impact of Multiple Income Streams
Multiple income sources, common among military families, can complicate withholding. Part-time jobs, side gigs, VA benefits, or rental income often lead to under-withholding because each source handles taxes as if it were your only income. This can result in unexpected tax liabilities. Furthermore, income from rentals and side businesses typically isn’t withheld at the source, posing additional challenges. Married couples filing jointly must consider their combined income streams.
Finding a Solution:
- Use the IRS Tax Withholding Estimator to check if you’re withholding enough.
- Adjust your employer’s W-4 to account for all income sources, not just your primary job.
- If self-employed, set aside taxes regularly or make estimated tax payments.
What Should You Do with a Refund?
If you do receive a refund, put it to good use:
- Boost Your Emergency Fund—Three to six months of expenses is ideal. You can earn interest in a High Yield Savings Account (HYSA).
- Pay Down High-Interest Debt—Credit cards or personal loans.
- Invest in Your Future—Contribute to an IRA, Roth IRA, or increase workplace retirement contributions.
- Plan for Big Expenses—Set aside funds for home repairs, tuition, or family needs.
Take Control of Your Paycheck
Instead of allowing the IRS to borrow your money interest-free, adjust your withholding to increase your paycheck’s impact. This allows you to invest, save, or spend towards immediate financial goals.
Need help reviewing your tax situation or planning for the year ahead? Let’s connect and ensure your finances work for you, not just Uncle Sam.
P.S. If you’ve experienced a major life change—new job, marriage, business income—now is the perfect time to review your tax strategy!