Why do people allow themselves to be overwithheld on their taxes?

Question

By allowing yourself to be overwithheld and then getting a big refund check is like giivng the government an interest free loan all year.
On the IRS website, there is even a calculator where you can enter your expected wages, deductions, and credits to determine the number of allowances to put on your W4.
Wouldn't you rather have that extra amount on your paycheck each week instead of waiting until tax time to get it all back in one big check?

Answer 1

It's basic finance, time value of money. I would certainly prefer the money now rather than later. My husband and I calculate our allowances and any extra to withhold in order to break even. I don't understand why people do that either. I guess it makes them feel better seeing a bigger number on their refund check. In the end, they're missing out on lost opportunities to invest the money and earn more. Oh well, their loss.

Answer 2

I totally agree with you but many people have been conditioned to receiving a refund cheque at tax time. Others do not want the inconvenience and frustration of having to pay at tax time because they deducted too much. Therefore, they allow a little larger deduction and have the pleasure of a refund cheque in the spring to purchase an item, small or large that requires a little more money.

Answer 3

yes what you say makes sense. however there are plenty of people that overspend and dont know how to save. by being "overwithheld" and receiving a bigger refund check helps people pay for things they may not have had the money for when they charged it. for example, a friend of mine bought an expensive mattress a year ago and it was interest-free, no payments for a year. well lo and behold a year has passed and she does not have the money to pay for it all and can possibly incur huge finance charges. i prepared her taxes and she will be receiving a large enough refund to cover this expense. and the only reason shes receiving a refund is because she chose to withhold more money each week. youre totally right in what you say, but the average person will spend that money as soon as they receive it.

Answer 4

Do the math. My checking account pays approx. 1% interest so if I'm over withheld $1000 over the course of the year, what's the penalty to me? $5. That's right, $5. Doing the calculations and research you suggest just isn't worth the trouble even if my total over withholding is $5000.

For those of you questioning the math...obviously 1% of $1000 is $10 but I don't earn interest on that money for the entire year. The weighted average time I have that money is 1/2 year, thus 1/2 of $10 or $5. Also, the compounding of interest is so small as to be inconsequential.

Answer 5

I would much rather get a big check at tax time. I am very bad at saving money (I am getting better now though), and last year we bought a new front door with a sidelight with the tax money. This year we plan on putting the extra cash in with our budget for our house remodel.
I get what you are saying about the interest free loan to the government, but everyone has their own preferences and this is mine.

Answer 6

Getting a refund unless a low earner with chld care credits too high to deal with by withholding cuts is unbeleivably stupid. You are right on. People love to give interest free loans to govt then PAY a fee to get that money back faster. Inexcusably stupid.

Answer 7

You have a good point. I wonder about the same.....This is the problem of being an employee, it just kills creativity and makes people slaves to their pay checks and employers. This prevents people from paying attention to the small, but important details.

Answer 8

I'd rather have too much taken out than too little. At least you get it back and do not have to pay a large sum at one time.