Over-Withholding A Poor Way To Save Refund Value Tripled If Invested For Retirement

One of the saddest laments Dan Pilla hears is from the taxpayer who allows Uncle Sam to over-withhold income tax because “it’s the only way I can save.”

“This is the world’s worst way to save money,” says Pilla, a tax litigation consultant who dissects page after page of Internal Revenue Service laws, rules and regulations.

While his work - writing books on taxes, conducting seminars and advising lawyers and tax experts - has involved defining and defending almost every kind of deduction - there is one that especially bothers him.

That is the one in which the taxpayer treats over-withholding casually.

Let’s illustrate what happens, he says. “Suppose the individual gets a $1,000 refund. That means $83 a month loaned interest free to the IRS.”

By the time that individual receives the refund in May or June, he or she has paid another five or six months of $83 payments, or $415. “So, what you end up with is not $1,000, but $585.” That is, $1,000 minus $415.

“Here’s what you do: Adjust your W-4 to stop the $83 a month withholding and put the money into an Individual Retirement Account or a 401(k) plan.

“By doing this for a full year you will have put $1,000 into your plan, thereby obtaining a $350 tax break.

“Let’s add it up. You have $1,000 cash in your tax-deferred plan, you’ve obtained a $350 tax break, you’ve probably earned $50 on your savings, and you’ve protected $415 cash from further withholding.

“That makes your total benefit around $1,815, or more than three times the real value of your refund.” In short, the over-withholder is wasting rather than saving.

Pilla, whose latest book, “Smart Taxes,” costs $29 (Winning Publications, Inc., St. Paul, Minn., Tel: 1-800 34 Notax), comes with another of his productions, “How To Fire The IRS,” and contains a refund guarantee if it doesn’t help you find an extra $1,000 or more in tax deductions.

From those publications and other sources, Pilla, an amiable young man who uses detailed knowledge rather than emotion to win his points, offers these other year-end considerations:

Pay your January mortgage bill in December, thus getting 13 months of deductions for interest, to which your entitled. This is a one-year benefit, but it certainly can help if you’ve got a nettlesome IRS liability.

If you’re going to make charitable donations, make them now - and get a statement from the organization, especially if the amount, whether in cash or food or clothing, is for more than $250.

This acknowledgment must be contemporaneous, so again you must be ready to prove it by spending 10 minutes at the bank to have your receipts notarized.