Overwithholding

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Overwithholding

Deducting and paying too much tax that may be refunded to the taxpayer or applied against the next period's obligation.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Overwithholding

A situation in which an employer withholds too much money from an employee's paycheck and gives the funds to the tax agency. This occurs when the employee does not make enough to qualify for the tax bracket used on the paycheck, or when the employee takes enough itemized deductions for which the withholding does not account to reduce his/her tax liability. Overwithholding usually results in a tax refund or in the application of the amount to next year's taxation.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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Clients who overwithhold are paying a significant opportunity cost for this action.
overwithhold and thus put many taxpayers in a "refund"
Schepanski and Shearer (1995) suggested that prospect theory can explain the phenomenon that individuals who underwithhold income taxes are more likely to engage in noncompliance than those who overwithhold. Their basic hypothesis is that these withholding positions differentially affect risk attitudes.