Miscalculations and unfamiliarity with tax regulations lead many taxpayers to overpay their taxes. Those who don't understand which deductions to make could lose substantial funds, for example. At the same time, no one wants to be penalized for underpaying. If you stress out about these concerns around tax time, learning about taxes might seem daunting. However, it will save you money year after year.
Losing Funds Exponentially
Most taxpayers who pay too much have lower or middle incomes, typically between $20,000 and $50,000, according to MSN Money. The wealthy usually estimate what they owe more precisely, perhaps because they have skilled accountants doing the math. This means the taxpayers who lose the most funds probably can't afford to lose them, particularly if they have families. They could have deposited the lost funds into an IRA account to make them multiple many times over before retirement or purchased bonds for their children's schooling. In essence, if they overpaid $1,500, they might really be losing $8,000 or $10,000.
Receiving Tax Credits
If you pay too much in taxes, you might receive a tax return, which many taxpayers find exciting because of the surprise factor. However, you should never rely on busy IRS personnel to catch your mistakes. Rather, you should know your own finances better than anyone else. The IRS issues refunds to roughly 100 million taxpayers each year, though, so if you believe you've overpaid by mistake, you might get your money back.
Restricting Access to Funds
If you have too much taken out of your paycheck for taxes, you don't get to invest those funds throughout the year. Aim to have the minimum amount withdrawn from each paycheck so you can make it perform for you. When tax time comes, you'll still owe money, but you'll also have more in the bank.
To stop overpaying taxes during each two-week pay period, file Form W-4, "Employee's Withholding Allowance Certificate," claiming all the allowances to which you're entitled. The IRS website can help you to calculate what you should pay in taxes for each paycheck and what allowances to claim. Knowing what deductions to take at tax time will also protect your pocketbook. For example, you can deduct charitable non-cash donations, insurance premiums, energy-saving home improvements and sometimes college tuition. Itemizing your tax return instead of choosing the standard deduction will also give you a precise estimation of what you owe.
- MSN Money: Don't Itemize? You May Be Overpaying IRS
- "The Everything Guide to Personal Finance for Single Mothers"; Susan Reynolds et al.; 2007
- Virginia Society of Certified Public Accountants: Update Your W-4 to Avoid Overpaying Taxes
- MSN Money; 10 Big Deductions Too Manyr of Us Miss; Jeff Schneppe
- Stockbyte/Stockbyte/Getty Images