Question

Suppose you filed your taxes and received a small refund from the IRS. What would have been the impact on the refund amount if you had increased the W-4 allowances for that tax year?

Answer 1

The W-4 form is used to keep your employer informed about the amount to be withheld from your pay as contribution towards federal taxes. If you claim more allowances using the W-4 form, the amount that the employer will hold back towards taxes will be less. Thus, you will have more money in your pocket in your take home pay.

Answer 2

Depending on your tax situation, it could result in a big refund check, but you are essentially extending an interest-free loan to the government by allowing them to hold on to your money all year. Many taxpayers would be better off receiving more of their paycheck throughout the year to cover personal allowances.

This will give you bigger paychecks, but a smaller tax refund (or potentially no tax refund or a tax bill at the end of the year).

The IRS likes to remind us that just about everything is taxed. It isn't just your paychecks that get tallied on a W-2 and end up on your tax return. Income means income from all sources.