Key insights
- The article discusses adjusting tax withholding in light of potential tax breaks from the 'One Big, Beautiful Bill Act.' Lower tax liability could lead to reduced withholding, increasing disposable income and potentially boosting consumer spending. However, the impact on equity markets is likely to be marginal.
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Did you pay more in taxes or receive a smaller refund this year than you expected? You can change how much tax is withheld from your paycheck to shape what you owe or get back next filing season.
Taxpayers can choose whether to pay more in taxes through each paycheck or when they file their tax returns by adjusting their withholding amount. In general, reducing your withholding lets you keep more of your money throughout the year.
However, withholding too little can lead to unexpected tax bills or even penalties. Increasing your withholding is safer, as it more often leads to refunds or smaller tax bills, but that means the IRS—not you—holds your money throughout the year and returns it as a refund.
Now that the 2026 tax filing season is over, you should know how your withholding in 2025 impacted your tax bill. That means it's time to start planning for the next filing season.
Withholding preferences depend on a taxpayer's financial obligations and comfort with a bigger bill when filing. For example, taxpayers squeezed by rising costs may want to reduce their withholding, while those who need an automatic savings tool may want to increase it.
Experts say taxpayers should check their withholding every year. But it's especially important this year, now that the One Big, Beautiful Bill Act has created tax breaks that will save taxpayers money.
Since many workers' tax liability is lower this year, they can reduce their withholding and keep more of each paycheck without triggering a surprise bill at filing time.
"If the new tax breaks in the One Big, Beautiful Bill take effect in 2026, many taxpayers may find their overall tax liability is lower," Heather Winston, a certified financial planner at Principal Financial Group, said in an email to Investopedia. "That could prompt some workers to adjust their withholding, so more of their paycheck comes home during the year, rather than waiting for a refund a year from now."
Most tax breaks from the One Big, Beautiful Bill Act first affected 2025 taxes, and initial estimates for 2025 returns show that the average taxpayer received a $3,462 refund, about 11% higher than the previous filing season. More tax breaks have taken effect for 2026, including a non-itemized charitable deduction for non-itemizers and expanded child care credits, which add to savings.
"Looking ahead, taxpayers should think of withholding as part of their broader financial planning strategy," Winston said. "For example, workers with qualified income from tips or overtime may see a meaningful difference in their take-home pay by updating their W-4. Reducing their default withholding will help them avoid overwithholding throughout the 2026 tax year."
Taxpayers can calculate their withholding amount on the free IRS Tax Withholding Estimator. Once they have their estimated withholding amount, they should complete a Form W-4 and submit it to their employer.
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