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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595, 623 (1982) ("Since the IRS normally computes overwithholding refunds without interest, the system causes taxpayers to forego the use of their funds during the year without compensation.").
MARK IWRY, USING TAX REFUNDS TO INCREASE SAVINGS AND RETIREMENT SECURITY 9 (2006) ("[A]t least for many households, the current level of withholding is not 'overwithholding,' but a deliberate method of forced savings."); Block Comments, supra note 16, at 25 (making mention of "the ...
Overwithholding reduces the amount of monthly discretionary cash flow that can be used to meet other financial goals and objectives.
of slightly overwithholding on wages encourages individual taxpayers to
Overwithholding is perceived as a gain, and underwithholding is perceived as a loss.
Some of the differences between liabilities and payments may be due to the overwithholding that reflects the type of withholding.
A taxpayer's view of these costs and benefits depends on enforcement (e.g., penalties, audit likelihood, audit costs imposed on the taxpayer, the public image of the tax agency, etc.), tax rates and their progressivity, and psychological factors, including framing effects from under- or overwithholding. (8)
Other mechanisms consumers commonly use that can be characterized as forced savings are the overwithholding of income taxes to ensure a refund and the accumulation of home equity through mortgage payments and property appreciation.
This behavior is similar to the use of overwithholding by many middle-income taxpayers as a means of "forced savings" (Barrow & Granahan, 2000; Neumark, 1995).
They also report a withholding phenomenon, namely that behavior differs, depending on a person's tax balance and respective underwithholding with additional payment or overwithholding with returns.
"Causes of Overwithholding: Forced Savings or Transaction Costs?