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Question: are there potential penalties for overwithholding? If I don't modify my W-4, the IRS withholding calculator estimates I will get a refund and, when I adjust the result for the amount of capital losses I realized in the past five weeks by moving my investments, it looks like I may receive a $1,598 federal refund when I file my Year 2004 tax returns.

Actually, if I don't get hit by AMT, it is possible I will have 7 years of reduced taxes because of the amount of capital losses.

This isn't like I am intentionally over-withholding my state income taxes to try to use it to further decrease my federal taxes, which I think is where my tax preparer got bit by penalties, but I'll have to ask more about this when I meet with her this Friday.
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Question: are there potential penalties for overwithholding?

No. IMO it's silly to give the government an interest-free loan, but YMMV.

Phil
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MarkOYoung: This isn't like I am intentionally over-withholding my state income taxes to try to use it to further decrease my federal taxes, which I think is where my tax preparer got bit by penalties, but I'll have to ask more about this when I meet with her this Friday.



If you over-withhold your state income taxes for 2004 and deduct the withheld amount on your Federal tax return for 2004, you'll also have to claim the state tax refund as taxable income in 2005.
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If you over-withhold your state income taxes for 2004 and deduct the withheld amount on your Federal tax return for 2004, you'll also have to claim the state tax refund as taxable income in 2005.

Note: Just to emphasize.......this is true only if you itemize deductions. If you have not itemized and claimed state income tax as a deduction, you don't have to claim the state tax refund as taxable income.

We paid off our house and property taxes are low for us so we don't itemize anymore and I almost missed this. I was so used to adding state tax refunds to income I almost did it automatically.

Carol
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Thank you for your replies!

IMO it's silly to give the government an interest-free loan, but YMMV.

I agree in princple--I could be using that principal for long-term investments.
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