Sure, it’s nice to get a big, fat refund come tax time. But that just means you overpaid your taxes last year.
Now Treasury Secretary Scott Bessent is urging Americans to review their tax withholdings to boost their paychecks.
On April 15, during a White House press conference about President Donald Trump’s tax breaks, Bessent encouraged workers to change the amount of income tax their employer deducts from each paycheck, if they haven’t already done so (1).
“If you change your withholding, you’ll get an automatic increase in actual pay… weekly or monthly,” he said, adding that “you’ll be able to keep more of your money this calendar year.”
But there’s a problem: Changing retention requires precision and can be tricky. If you make a mistake, you could end up owing money next tax season.
The One Big Beautiful Bill Act (OBBBA), which was signed into law last July, included new tax deductions for tax year 2025, including deductions for tax income, overtime earnings, and auto loan interest.
For some people, that resulted in a larger refund than usual. But that is not the main reason.
Since OBBBA was enacted mid-year, the IRS did not update its employer withholding tables (which help employers calculate how much federal income tax should be deducted from your paycheck).
As a result, many Americans received a larger tax refund this tax season. The average refund is $3,462 (as of April 3), according to IRS data. That’s more than 11% more than last year’s average refund of $3,116 (2).
Changing your withholding doesn’t magically put more money in your wallet. You still owe the same amount of taxes. Withholding simply changes the amount of money your employer withholds from your paycheck to cover your taxes.
If you didn’t do so on your 2025 tax return, you have time to make changes for the 2026 tax year. While this could improve your tax situation, you’ll also want to be aware of the risks.
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Changing withholdings from your paycheck could have “negative consequences,” John Nowak, founder of Alo Financial Planning in Mount Prospect, Illinois, told CNBC (3).
If you don’t withhold enough throughout the year, you could end up owing money to the IRS after you file your annual return, which could be an unpleasant surprise if you were expecting a refund.
On top of that, you could end up paying an IRS underpayment penalty if your total withholding doesn’t cover at least 90% of the tax shown on your return. Additionally, the IRS charges interest on penalties (4).
While there’s nothing wrong with overpaying (at least you won’t have to worry about penalties and interest for underpayments), it does come with an opportunity cost.
Basically, overpaying is like giving the government a large interest-free loan, instead of increasing your own wealth. It also reduces your take-home pay and gives you less financial flexibility.
For example, with more take-home pay, you could use that money to pay bills, pay off debt, or build an emergency fund. You can also invest or set aside it in a high-interest savings account, making that money work for you.
During inflationary times, it may make more sense to have larger paychecks throughout the year than one large annual refund. If you’re overpaying taxes, when you receive that money in 2027, you may have lost some of your purchasing power.
If you received a large tax refund this year, you may be overpaying. On the other hand, if you owe a large tax bill after filing your taxes, you may not be withholding enough.
You may also want to consider adjusting your withholding “if you’ve recently had a major life change, such as getting married, starting a side business, or having a baby,” according to Experian (5).
Nowak told CNBC that instead of making “haphazard changes,” taxpayers may want to consider using the IRS’s free tax withholding estimator (6). This tool can help you estimate how much tax your employer should withhold each year.
If you have a complex financial situation (such as multiple jobs), you may want to consult with a tax expert.
You can change the amount of taxes withheld from your paycheck by submitting Form W-4 (7) to your employer. This can be done at any time of the year.
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YouTube (1); Internal Revenue Service (2), (4), (6), (7); CNBC (3); Experian (5)
This article originally appeared on Moneywise.com with the title: Scott Bessent Urges Americans to Stop Letting IRS Hold Their Cash: ‘Automatic Real Wage Increase’ Expected
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
