Overwithholding: A Bad Idea

Would you work for someone who wasn't going to pay you until a year later? Would you take out a loan at your bank for 18% and then lend the money to someone else for a year at no interest?
Any intelligent person would answer both questions "NO" immediately, and yet thousands of soldiers do exactly that every year. They have too much tax withheld from their annual pay in order to get a bigger refund the following year when they settle their income tax. In other words they won't get paid until next year for work done last year.
Overwithholding is basically an interest-free loan from the taxpayer to the government. There's no profit in overwithholding for the poor taxpayer. In fact by the time the taxpayer gets the money back, the purchasing power of the amount withheld may be reduced by 3% or more due to inflation, so the taxpayer actually ends up losing value. Finally, the opportunity cost of overwithholding may well be 18% or more, especially if the taxpayer has any credit card debt. I have seen clients struggling to pay off credit card debts with an interest rate of 18% or more, at the same time that they're making interest-free loans to the government by overwithholding. It's really crazy.
The annual interest on $1200 of credit card debt can be $216 or more. By correcting their withholding, overwithholders could get an extra $100 or more in their take-home pay every month to pay off their credit cards, which could save them $216 in interest in just a year.
So don't wait for Congress to give you a pay raise. Give yourself a pay raise right now by sending a corrected W-4 to Finance to eliminate your overwithholding.
Remember, each case is different. This summary gives you general information only. It is not a substitute for talking with a lawyer. You may consult a legal assistance attorney.
 For more tax information, contact your Unit Tax Advisor or the Army Tax Assistance Center at 684-4986.

Last Reviewed: July 21, 2008

 
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