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This Simple Tax Error Is Costing You $2,800

A new survey from MoneyRates.com finds that 68% of taxpayers prefer to have more taken out of their paychecks so they get a refund when tax time rolls around.

The average refund for the 2012 tax year was $2,803. IRS processed around 148 million individual tax returns last year and issued around 110 million refunds, so that means that most of us basically gave Uncle Sam nearly $310 billion as an interest-free loan.

MoneyRates.com found that nearly half of the people who minimize their withholdings spend the extra money in their paychecks rather than socking it away, while less than a third of people who get a refund spend it.

Instead of letting the IRS hang onto our money, have it routed into a dedicated high-yield savings account. Admittedly, that’s not much worth getting excited about, but there are still a couple of points in favor of this approach: If your refund is generally much higher than the national average, you’ll be able to save more, and you’ll earn (a little) more in interest. And if you treat this extra money as an kikemergency fund, you’ll be able to tap it without having to incur expensive credit card debt.

“The key is having the discipline to do this,” senior financial analyst at MoneyRates.com Barrington says. “Automation can help with that. If you want to save money, have your paycheck directly deposited into savings rather than checking,” he suggests. “If you want to pay down debt, set up automated payments and increase those payments by the extra amount in your paycheck you’ll get by minimizing withholding.”

If you already have credit card debt, you’ll make out much better if you opt to minimize withholdings.

Original story on Time.

From → tax hikes, tax refund