We have tried for years to convince many
stubborn clients that over-withholding is a foolish practice. The IRS pays no
They would be far better served to adjust
their withholding down and invest the monthly savings in a mutual fund
or interest-bearing cash account. The money would still be
available (plus interest) for that beach vacation in the Spring.
An even better investment would be to pay down any high
interest rate credit cards you may have. See our Debt Investment Calculator for a
demonstration of the return you obtain when paying down credit cards!
It really doesn't take a lot of calculations however to clearly
demonstrate with hard numbers that you can double or even
triple the financial impact of your over-withholding.
Simply paying down your credit card debt each month would likely
double or triple the impact of your refund. But, what about paying down your home
mortgage each month. Nearly 120 million tax refunds are
issued by the IRS each year at nearly $2,700 per refund.
If your refund is around $1,600, that would
equal $130 per month in over-withholding.
If that amount were instead applied toward your home mortgage payment each month,
the investment would return $8,321 assuming an 8 percent 30 year mortgage.
If you continue to apply the $130 over-withholding amount to your
mortgage payment until the debt is paid off, your 30 year mortgage would be paid off in 22
years with a net savings of $49,974.
Of course, it must be pointed out that the additional $130 per month
in your paycheck can work similar financial magic in a 401(k) plan, insurance policy,
mutual fund, etc.
With our nation's economy currently slumping, there is more motivation than usual for taxpayers to ensure that their paychecks are not
You have the right to adjust your withholding statement, Form W-4,
on a regular basis by informing your employer. If you are unsure about the
adjustment amount, please call our office. We can review your prior year return and
assist you in adjusting your withholdings for the remainder of 2019.