Why the change in the tax law regarding withholding?

Question

Unless I am mistaken, before federal income withholding was created, everyone paid their taxes for the previous year by tax day. Then when the atrocity of withholding was enacted, all of a sudden taxes are due upon receipt of paycheck and not on tax day. I can kind of understand how withholding makes things easier for both taxpayer and IRS, but why not give the taxpayer the option to pay the old way, all at once?

I have two main concerns with this. By never having posession of the money, the taxpayer is less aware of the amount than if they had to write a check every pay period.

Secondly, before withholding, the taxpayer could set aside and invest the money and then pay at the end of the year. The longer the taxpayer has the money, the more they could make. But withholding is in essence an instant interest free loan to the govt.

The govt knows that the taxpayer is being exploited because it doesn't allow the individual to opt out of withholding if they wanted to.

A few of comments: First, why on earth would Congress change the law that detracts from the money they take from their constituents? That's like asking them to reduce their salaries. It's never going to happen.

Also, there is a big difference between seeing what was taken on your pay stub and writing a check each pay period. Since you never have the money in possession, you don't miss it as much.

In addition, why does the IRS get interest on underpayments but the tax payer (whose money it really is) can't? Congress obviously sees the value in the interest that could be made over the year. The deck is stacked against the citizen from the get go with no chance for recourse. Okay, a lot of people had trouble paying the full amount in April. Let them pay withholding, but also let those who don't want withholding to opt out. It's unfair to punish the responsible citizens who can manage their money because of the actions of the dumber ones.

Answer 1

Withholding is there for a reason. Basically, we, the average citizen, aren't trusted enough to save money for the entire year to pay our tax liability.

If you want to opt out of tax withholding, then claim 10 or more exemptions on your W-4. Then on April 15, you can pay all of your taxes plus the penalties and interest for not having enough taxes withheld.

I'm sure that the penalties and interst on the underpaying of taxes will more than wipe out any possible gains that you can expect to get by investing your money for the year.

Answer 2

I don't think there is any plot on the part of the IRS or Congress to oppress or exploit the wage earner.

Taxes on wages are due when the wages are earned, there is no "tax day".

Your first concern, that the taxpayer is not aware of their money, can be solved if people educate themselves about the deductions on their paycheck.

If a person withholds too much in taxes, then they are loaning the government money. But if a person correctly withholds their taxes, there is no loan. In fact, in most cases, the government will allow you to underpay $1,000 of your taxes up to the filing deadline, with no penalty or interest charged as long as you file and pay by the filing deadline.

While taxpayers have to pay interest if they don't pay (most of) their tax on time, the IRS will pay interest if a refund is delayed, even if the delay is caused by the taxpayer filing late.

What you legally can do is withhold less than the taxes due, and then in, say, October, figure your taxes and increase your withholding the last couple of months of the year. This will allow you the use of your tax money for most of the year.

Answer 3

Withholding was developed because many taxpayers could not come up with the money all at once -- taxpayers didn't save the money as you suggest they would. Instead of having the IRS chasing taxpayers down, Congress changed the law to implement withholding to both take the pressure off taxpayers AND steady out the income stream for the government.

Every employee gets a pay stub every payday that lists all of the withholdings. Anyone too lazy to look at it probably doesn't give a toss what their tax bite is.

If you don't like the law as it currently exists, contact your elected representatives. Withholding isn't an IRS requirement, it was enacted into law by Congress.

Answer 4

The IRS would be happy to have you pay your taxes all at once, as long as you pay them in advance.