January 31, 2014
If you are a person who loves getting that big refund check from Uncle Sam every year at tax time, you have probably been told (numerous times) that you are making a bad financial move by letting that money sit in the IRS coffers all year. The reasoning for this opinion may be sound, but there can be advantages to setting up your withholding so that a bit more is taken out in taxes than is necessary.
Receiving a check or automatic deposit from the IRS in one lump sum can be a good thing in many ways. Many people find it extremely difficult to hang onto that bit of extra money they get from reduced withholding per month if it is just sitting there in a savings account. Income tax withholding can be a form of "forced savings" from each of your paychecks, so that once a year you know you will have a lump sum to pay off bills, take a trip, or spend on a large purchase like a home appliance or new tires for the car.
Some people have more withheld from their paychecks each month to avoid any risk of owing at tax time. If you plan incorrectly, or if tax law changes catch you unaware, you could end up owing money to the IRS - and if you do not have savings to draw from, you could end up paying late penalties and fees.
Some people have almost nothing withheld, but due to tax credits they may still receive a large refund from the IRS. If you pay no federal income taxes due to low income or non-taxable income (SSI, government assistance), you may still be able to take the Earned Income Tax Credit and/or Child Tax Credit, to receive a "refund."
"It's your money, and your withholding amount is up to you." explained Paul Stanley of eTax.com "If receiving a large refund each year works for you, donŐt worry overmuch about what the 'financial authorities' say."