Newsletter

Although it is now approaching the end of the year, we are going to address one of the chief frustrations of many CPA's - over-withholding by our clients.  We've heard your reasoning. 

You don't have the discipline to save money yourself, so you have Uncle Sam save it for you.  Also, there's always the Spring Break issue!  If you're getting a big refund check, it comes in quite handy when making your beach hotel reservations.

We have tried for years to convince many stubborn clients that over-withholding is a foolish practice.   The IRS pays no interest.

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 being over-withheld.

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.