It’s no secret that a majority of Americans use tax withholding from their paychecks as a major savings tool. They give the government more than they owe in income tax throughout the year just so they can get a check the following spring. For many low-income filers, overwithholding has become their preferred, and perhaps their only, way to save. They ought to have a better option.

Traditional economists say deliberately having too much tax withheld throughout the year is an extremely poor savings strategy. Americans are giving the US Treasury with an interest free loan for the duration of the year while many take out loans with 14 percent interested. They could have avoided taking out those loans and paid cash for whatever they borrowed the money for.

The size of this phenomenon is stunning. In 2017, the IRS issued almost $437 billion in refunds to about 122 million households—more than two-thirds of all filers. It refunded about $383 billion in individual income taxes and paid an average refund of almost $2,700. Households making less than $50,000 received one-quarter of all refunds, or about $100 billion. Some came from refundable tax credits but plenty was excess withholding.

So why do we do it? It feels good to get that check every spring—certainly better than writing a check to the IRS. According to one survey, 80 percent of low- and moderate-income tax filers explicitly say they consider overwithholding a savings tool. For many Americans, especially those who do not have bank accounts, there appears to be no better way to save. And that is a problem.

Want to stop giving the US Treasury an interest free loan? Click here to speak with a tax professional at USA Tax Prep Plus. We will be able to properly help you plan your taxes and help avoid giving the government a year long interest free loan.

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