Business

You’re probably losing money by overpaying taxes

Some taxpayers give until it hurts.

For many Americans, taxes are their biggest expense, and yet millions continue to give much more to Uncle Sam than they must.

That’s because they are giving the federal government yearlong, interest-free loans, and the loan amounts are rising. Once again this year, many taxpayers are receiving huge tax refunds. The IRS expects the average refund to be around $3,000 in 2016, vs. $2,500 in 2006.

The practice of paying more taxes than necessary amounts to giving the government an interest-free loan for about 14 months, according to advisers.

Yet many Americans, facing big bills, continue to do it.

“More than half of Americans either expect to get a refund or have already received one this year,” according to a new survey by Bankrate.com, which asked taxpayers what they planned to do with their refunds.

Most advisers and tax experts believe “loaning” the federal government thousands of dollars is bad money management.

“It’s amazing. You’re taking money out of the bank and investments, where it is making money, and loaning it to the government. Then it is returning it at zero percent interest,” says Anthony Ogorek, an adviser in Williamsville, NY. “They should stop doing it.”

Ogorek says many taxpayers are confused. They think they receive something in a refund. In fact, “They are just getting their property back that the government has been holding for over a year,” Ogorek adds.

“A lot of people are averse to changing their tax withholding,” adds Charles Hughes, an adviser in Bay Shore, NY. “They look upon this as a kind of forced savings.”

But Hughes, who says a taxpayer should either owe or get small amounts back in refunds, warns that the big refund can cause problems.

“Some people who are overpaying taxes are owing on bills that could have been paid and avoided interest,” adds Kay Bell, a tax analyst with Bankrate.com.

What are people doing when they get their money back after more than a year of giving more than required?

Most poll respondents expect to pay down debt, spend more on necessities and save more with their refund dollars.