Shrinking Tax Refunds: The Culprit Might Be Your W-4, Not Changing Tax Laws

The IRS has some news that might make your wallet feel a bit lighter this year. According to their reports, tax refunds are looking about 29% slimmer compared to previous years. While some folks might be quick to point fingers at "changing tax laws," the reality is that the tax code hasn't undergone any major facelifts since 2018. So, what's the real reason behind these shrinking refunds?

More often than not, the culprit is an incorrectly filled-out W-4. You see, even if your overall tax liability hasn't budged, the amount you've withheld throughout the year might be less than what you did in years past. So, when tax season rolls around and you're eagerly awaiting that sweet, sweet refund, you might be in for a bit of a surprise – even though you owe the same amount in taxes, your refund is smaller.

Now, I'll be the first to admit that I'd rather owe a smidge than get a big refund, but I know some of you out there like to use your tax refund as a sort of forced-savings account. Hey, no judgment here! Just keep in mind that it's technically an interest-free loan to the government. If you want to keep tabs on your withholdings throughout the year, the IRS has a handy-dandy tax withholding estimator you can use to see exactly where you stand. Oh, and don't forget about those pesky state taxes, too!

Personally, I like to set a flat amount at the beginning of the year for my W-2 withholdings, based on my projected annual income. As an S-corp owner, some of my income comes via a wage, while the rest flows through as business income. I withhold a flat amount that accounts for both my W-2 income and my business income. Then, like a responsible tax nerd, I check in periodically throughout the year to see if I'm over or under withholding and make adjustments as needed.

Trust me, the worst kind of surprise is a tax surprise – so staying on top of your withholdings can help you avoid any unwanted tax-time bombshells.