Question:
When your cousin Roger started a new job in January 2010, he instructed his employer to withhold substantially more federal income tax from his monthly paycheck than was indicated by his marital status and family situation. As a result, in both 2010 and in 2012 he received significant refunds after filing his tax returns. In 2011, Roger had some unanticipated income from selling books he bought at thrift shops on Amazon that resulted in his actually owing a small amount of additional tax at filing, but he believes that was just a “one-time event†for that and he does not believe that situation will be repeated. Roger expects to receive a substantial refund when he files for 2013 and he views this strategy as an efficient means of enforced savings. Do you agree? Why or why not? Since Roger can be a little set in his ways, he will usually listen to you, do you have any advice for him?
Answer
Title: Analysis of Roger’s Tax Withholding Strategy Introduction: Roger has been withholding more federal income tax from his paycheck than necessary, resulting in significant refunds in 2010 and 2012, and owing a small amount in 2011 due to unanticipated income. He plans to continue this strategy for 2013, viewing it as a form of enforced savings. This discussion will analyze the effectiveness of Roger’s strategy and provide advice for him. Analysis of Roger’s Tax Withholding Strategy: 1. Pros of Roger’s Strategy: – Roger receives significant refunds after filing his tax returns, which can be seen as a forced savings mechanism. – By over-withholding, Roger ensures that he does not owe a large sum of money at tax filing time, providing financial security. 2. Cons of Roger’s Strategy: – By over-withholding, Roger is essentially giving the government an interest-
