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The Honolulu Advertiser
Posted on: Thursday, March 23, 2006

Keep your tax refund for you

By Dennis Cauchon
USA Today

Americans are enjoying their biggest tax refunds ever and it's costing them billions of dollars.

Taxpayers overpaid their federal income taxes by a record 29 percent in both 2003 and 2004, according to an analysis of Internal Revenue Service data.

That has pushed refunds to more than $200 billion a year. Though final figures aren't available for the 2005 tax year, the average refund so far is $2,423, up 4 percent from last year.

The fatter refunds are the result of taxpayers withholding nearly twice the traditional safety margin from their paychecks to avoid a year-end tax bill.

The extra withholding gives the government an interest-free loan worth more than $10 billion a year, equal to about $100 per tax return.

Congress' increasing use of tax credits and deductions caused the jump in overwithholding.

Changes in tax rates automatically revise withholding levels. Changes in tax credits and deductions do not.

Workers benefiting from expanded credits or deductions must fill out new W-4 forms to change the amount of money deducted from their paychecks.

The child tax credit, which rose from $500 to $1,000 per child in 2001, is the biggest reason for a jump in excessive withholding. More than 25 million tax returns claim this credit, worth $55 billion in 2005, according to the Office of Management and Budget.

Tax credits are available for a dozen purposes, including college education, adoption assistance and childcare expenses.

The portion of returns claiming at least one credit rose from 13 percent in 1995 to 31 percent in 2003. Credits reduce the tax owed dollar for dollar.

Expanded deductions for health costs, college expenses and retirement accounts also played a role. Deductions reduce income that is subject to tax, rather than the tax itself.

Overwithholding has grown fastest among families earning $50,000 or less per year because they benefit most from tax credits.

Refunds for low-income people have spawned the profitable and controversial refund-anticipation loan business. More than 12 million taxpayers a year borrow their refund after filling out their tax form.

These loans, which typically cost $100 or more, get taxpayers their money about 10 days earlier than Internal Revenue Service.

"People should adjust their W-4s to get smaller refunds," says Chi Chi Wu, a lawyer with the National Consumer Law Center. "It's crazy to lend your money to the government interest-free and then pay triple-digit interest for a refund-anticipation loan."