Is Your Withholding Too High?

While a tax refund is a sweet financial booster -- helping to pay bills and further financial or career goals -- experts debate whether the prevalence of big refunds may actually hurt some taxpayers, particularly low-income groups.

Damon Jones, an assistant professor at the Harris School of Public Policy at University of Chicago, has researched why refunds are deployed. He argues that one reason they have become so prevalent is simply that people don't take the time to adjust their income withholdings throughout the year.

"For people who live paycheck-to-paycheck, they could lower their withholdings and that additional income on each paycheck could be useful in making ends meet," he says. "Instead, that money is backloaded into a refund and affects the timing of income during the year."

As a financial planning expert, Carmen Wong Ulrich, author of the “The Real Cost of Living,” agrees. She advises people to look closely at how much income they are withholding. Overpaying is, in the simplest terms, giving the government an interest-free loan on your money.

"A refund means that you've been handing your money over to the IRS with every single paycheck -- too much money. And that money that should be in your pocket or your bank account," she says. "Work on your withholding numbers so you don't get a big check next year but instead get a bigger paycheck every month."

-- courtesy of DailyFinance.com

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