Stop overpaying the IRS

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The average federal tax refund so far this filing season is $3,034.

That’s a very nice chunk of change. It’s $90 more than the average refund issued in February last year.

The Internal Revenue Service says that most taxpayers get refunds each year. The size of the average tax refund is probably the main reason that so many intentionally have too much money withheld from their pay. Basically, they view their payroll withholding as a forced savings account that they can’t raid until they file their tax returns.

That approach was confirmed by participants in a recent online poll by the National Foundation for Credit Counseling, or NFCC. In fact, 2014 is the second year in a row that the majority of NFCC poll respondents confirmed their preference for the annual refund windfall.

Why refunds are bad

Still, say many financial experts, overwithholding is not a good idea.

“Often the very people who celebrate receiving a refund are those who are most in need of extra money in their pocket each month,” NFCC spokesperson Gail Cunningham said in a statement releasing the poll results. “Living paycheck to paycheck, people often fall behind on important priorities such as rent or vehicle payments.”

A refund of $3,000 means that the taxpayer could instead be receiving an extra $250 in pay every month. That, said Cunningham, could mean the difference between making a rent payment or getting an eviction.

And despite good intentions of using refund money to pay off debt or stash it in a savings account, many folks end up spending their tax refund on a once-per-year splurge.

More reasons not to overwithhold

In conjunction with the poll, NFCC also came up with a list of reasons why folks shouldn’t have too much in tax taken out of their paychecks.

Making the list is the argument that I’ve made for years: You’re giving Uncle Sam an interest-free loan of your money. Yes, I know interest rates on short-term savings vehicles like CDs stink, so you’re not losing much by not putting that money into an account for yourself. But it’s the principle, people! You scrimp and save, celebrating 25-cent grocery coupons and buy-one-get-one-free offers, yet hand over your money to the federal government for months!

What happens when you have an emergency? NFCC’s list notes that not having ready access to your cash because it’s in the U.S. Treasury’s hands for a few more months could put you in financial jeopardy if you encounter an unplanned expense.

Also catching my eye on the list were the reminders that when you have less cash on hand, you might be more likely to (1) make late payments that will ding your credit rating and (2) charge purchases, putting yourself in or deeper into debt where you’re racking up interest charges.

Adjust your withholding

It’s easy to stop Uncle Sam’s hold on your excess tax payments. Simply adjust your withholding.

The goal is to get your withholding amount as close to your eventual tax bill as possible. Bankrate’s tax tip explains ways to figure the proper amount. Then you enter it on a new W-4 that you file with your employer.

You can make the change any time. But the sooner you adjust your withholding, the sooner you have more of your own money in your hands.

More tax info from Bankrate

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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and co-author of the e-book “Future Millionaires’ Guidebook.”