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to withhold or not?

Posted on 24. Mar, 2009 by dara in penny pinchin'

It’s tax season, and that means many of us are skipping happily to the bank with our refund checks or anxiously awaiting them and planning their demise. This can be an exciting time of the year for many and for others it can be painful to discover that you owe the IRS money. If you’re like me, you’re in the “exciting time of year” category and in my honest opinion, there’s nothing wrong with that. However, people have cautioned me against withholding too much citing that I’m giving the IRS an interest free loan. My rebuttal is that during the year I’d squander the money away, but when it comes as a lump sum, I do something useful with it. I’ve had people turn their noses up time and time again upon hearing that and I still feel that it’s up to each person to decide but for me withholding is best.

I recently read an article in Money magazine that backs me up and pushes conventional wisdom out the door. In the article, it’s mentioned that last year 69% of Americans received income tax returns at an average of $2,429 per return. While we’ve always been told that it’s not smart to give the IRS an interest free loan for a year, the author contends that trying to get the balance right on your W-4 can be tricky and most likely not worth it in the long run. Citing the average return of $2,429, that would be approximately an additional $202 per month. If you deposited that $202 into a high interest savings account that earned 3% (which is hard to find right now with the economy), at year end you’d have an additional $34. This is of course assuming that you would deposit the extra $202 into savings on a consistent basis.

Now I don’t know about you, but I can speak for myself and say that I would not put that extra money into savings. I just wouldn’t. Too much to do, things come up…car repairs, birthdays, fashion must-haves, overuse in cell phone minutes, you name it…it’s going to come. Research has also shown that people who get bonuses tend to save more of the money than those who get the same amount in smaller amounts over time. So majority of us would be more likely to do something meaningful with the money, like save or pay off debt. My bottom line is that personally it’s easier and more meaningful to receive the refund, I do more with it and I’m willing to sacrifice $34 right now to have the lump sum during tax time. What are your thoughts, could you be disciplined and save over a year gaining the additional $34 in interest or are you just as delighted as me that someone finally understands the motive behind our madness?

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Tags: average income tax return, federal income tax returns, irs, w-4