Underpayment of taxes leads you to a tax debt, and overpayment of taxes gets you a refund. That is the reason why many taxpayers overpay in order to avoid underpaying. This is especially true for businesses that withhold and pay taxes on behalf of their employees, and those who pay estimated taxes. If you are unsure of your tax liability for any reason, it is better to pay more and receive a refund than to pay less and receive an IRS notice for the payment of tax debt. At the same time, it is best to adjust your withholdings to file the accurate amount of taxes owed if you are overpaying at every filing or have a tax debt that needs to be fulfilled.
The Wall Street Journal shares some interesting statistics and advises taxpayers on reviewing their withholdings:
“ . . . This is a good time for many people to review their tax situation, taking a fresh look at their withholding, estimated-tax payments or both, experts say. (Millions of people make estimated-tax payments on income that isn’t subject to withholding, such as earnings from self-employment, interest, dividends and rents.)
“Each year, most taxpayers pay too much during the year and then file for refunds. Here are the latest numbers:
- As of May 9, the Internal Revenue Service had received more than 136 million income-tax returns filed by individuals, and had processed about 131.1 million of them.
- Total refunds: about 101.2 million.
- Those refunds totalled nearly $272.5 billion, up 1.7% from the comparable period a year ago.
- Average refund: $2,693, up 1.6%.
“Millions of people cherish the idea of getting refunds each year. They view it as a form of forced savings. But many of those taxpayers, especially those saddled with expensive credit card debt and other high-cost loans, should consider adjusting their withholding, estimated-tax payments, or both, says Stephen W. DeFilippis of the DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill.
“‘There are many ways in which taxpayers can better utilize those funds, such as by paying off debt, rather than making interest-free loans to the government,’ says Mr. DeFilippis. (He is also an ‘enrolled agent’ authorized to represent taxpayers at all levels at the IRS.)
“In other cases, taxpayers may want to increase their withholding due to increased income or other factors.”
Planning taxes can minimize unpredictability. Except for the unusual fluctuations in income, adjustment in withholdings can help taxpayers to use the extra amount to pay off debts. It must also be remembered that early payment of a debt also saves money in interest. Therefore, it is a good idea to review your tax history and explore ways to file accurately so that you can use the funds elsewhere.