3 Reasons You Don’t Want a Big Tax Refund Next Year

Paula Heid is an assistant director in High-Net-Worth Tax Planning at Northwestern Mutual.

It may be surprising to hear that some experts want to help you avoid a big tax refund. After all, most people aren't going to turn down a cash windfall. And it can feel like "free money" that's fun to spend any way you want.

But it’s important to remember that if you’re entitled to a refund, it’s likely because you overpaid your income taxes throughout the year—the IRS is simply giving back what was yours to begin with. Being more strategic about your taxes may lead to a smaller refund, but you’ll keep more of your hard-earned money in your pocket. Let’s talk about what you might do with that money instead, and how you could prevent yourself from getting a large tax refund next year.

Why you don’t want a big tax refund

The simple reason is that it means you overpaid your taxes throughout the year—and essentially gave Uncle Sam a free loan. This doesn’t make the most financial sense, especially if you’re working toward financial goals like paying down high-interest debt. Instead, you could make your money work a little harder for you. Here’s how.

3 ways to put your money to better use

In 2025, an estimated 90.2 million taxpayers received a refund, with an average direct deposit refund of $3,023, according to the IRS. Instead of paying more in taxes, you could put your money to better use.

1. Save for retirement

When you let the government sit on thousands of dollars for up to 12 months, you’re giving up a huge opportunity for savings—and missing out on the power of compound interest. Instead of waiting for the IRS to refund your overpayments, you could bump up your 401(k) contributions by a percentage point or two. That could add up significantly over several decades.

Since 1970, the average annualized return of a stock market index called the S&P 500 has been more than 10 percent. Let’s say you started investing $250 per month ($3,023 divided by 12 and rounded). After 30 years, you could be sitting on over $500,000.

2. Build up your emergency fund

Instead of overpaying your taxes, you could use that money toward emergency savings. A strong emergency fund is an essential part of financial wellness. If you run into an unexpected car repair or medical bill, you’ll be happy to have that safety net. The general rule is to save up three to six months’ worth of living expenses, preferably in a high-yield savings account that can allow you to make money in your sleep.

3. Pay down debt

If you’re carrying credit card balances or owe a lot in student loans, you aren’t alone. An extra $250 each month could help you pay down debt a little faster and reduce how much you spend in total interest. In some cases, having that extra cash on hand might even prevent you from accumulating debt in the first place. Getting debt-free can unlock even more money that you could put toward other financial goals, whether that’s growing your nest egg, buying a home or planning your next vacation.

How to reduce your refund

If you typically receive a modest refund each year, there’s no need to rush to your HR department and adjust your tax withholding. But if your refund is above $1,000—or a relatively large percentage of your income—you might consider making an adjustment.

You are not required to update your W-4 form every year, but if you haven’t completed a new W-4 with your employer for several years, it might be worth simply completing a new W-4. Each year, the W-4 may have minor revisions; however, the W-4 went through a major redesign in 2020 and eliminated withholding allowances. The form was designed to better approximate withholding to your federal liability based on your filing status and anticipated credits for dependents. If you want to go even further or you have other income subject to tax where there is no withholding (e.g., investment income), the IRS tax withholding estimator can help you estimate your federal income tax withholding and understand how it affects your tax refund and take-home pay. You’ll want to have the following on hand:

• Paystubs for all your jobs, as well as your spouse’s if you’re filing a joint return
• The amount of income earned from any other sources, such as side gigs, freelance work or investments
• Your most recent tax return

If you decide to change your federal tax withholding amount, you can do so by filling out IRS Form W-4 and submitting it to your employer. If you pay state income taxes, consider whether an adjustment is necessary there as well.

The process is a little different if you’re self-employed. Instead of having federal income taxes withheld from your paychecks, you’re obligated to make quarterly estimated tax payments directly to the IRS if you expect to owe $1,000 or more in taxes. Simply reducing your tax payments each quarter could help avoid a tax refund later on. No matter your situation, a tax professional can be a great resource for tailored guidance.

This strategy works only if you’re intentional with your money

The theory that it’s better to have more money in your pocket than to overpay taxes makes sense only if you’re using it strategically. If that extra cash goes toward impulse buys or treats, you may be better off leaving your withholding alone and receiving a cash windfall come tax season. After all, forced saving is better than no saving at all.

But if you do decide to make a change, plan ahead for how you'll use that extra money coming your way each month. Then commit to sticking to it. One option is to set up an automatic transfer every payday from your checking account to a savings, retirement or investment account. Another option is to increase your automatic debt payments. Either way, your future self will probably thank you.

Your Northwestern Mutual financial advisor can help

If you want tips on getting the most out of your money, get in touch with your Northwestern Mutual financial advisor today. They will start by getting to know you and asking thoughtful questions to understand your financial situation. From there, they can offer practical advice to help you meet your goals.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.