Q. Is increasing what is withheld from my paychecks a good idea? I’ve really come to count on getting that tax refund each year.

by Lu-Ann Dominguez on April 02, 2012

In a perfect world, we would make sure that exactly the right amount is withheld from our paychecks throughout the year so that we don’t owe the IRS, and the IRS doesn’t owe us.

However, many people have come to rely on the annual tax-season windfall – which is really not a windfall at all, since you’ve technically had too much taken out of your paycheck and the government is paying you back the amount you overpaid, interest-free. Still, planning your withholdings such that you are fairly certain of a tax refund can help some people avoid debt and the sticky, problematic world of IRS collections.

I’ve had clients with debt issues that snowballed because of insufficient withholding. Some have been unable to pay the IRS what is due, and so they don’t file their income tax return at all. Bad move. When the IRS come calling for the money that is owed – and it will – they have the power to issue to tax liens, levies on your wages and bank accounts. These collection efforts can ruin your credit and create problems that last for years.

In the last month alone, I’ve seen some 50 tax liens, each for more than $100,000 put into place.

Arranging your withholding so that you get some small amount of money back at tax time is so much better than to risk going through a collection nightmare.

Read the recent Associated Press article in which I was quoted on this topic:  It’s OK to get a tax refund if you don’t blow it.

This post is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this information.