Overpaying: so the IRS issues a refund. That's part of the process.

Deductions: 86% of tax returns use the standard deduction. It's OK for the IRS to assume that the standard deduction will be used unless the taxpayer tells them that they want to itemize.

> Overpaying: so the IRS issues a refund. That's part of the process.

Isn't this a 1 way street where the IRS wins?

For example, if you underpay don't you have to pay interest at a set rate for the whole year you underpaid where as if you over pay you'll get interest from April 15th until the time it takes to receive your refund which might be a few days or a couple of weeks?

If you file on time but underpaid estimated taxes, you only get a penalty if it’s more than than the greater of $1000 or 10%, and a variety of other conditions don’t apply (not tax advice, see Form 2210 for the gory details).

For the average citizen, a little bit of opportunity cost is much less important than the costs of getting hit by a surprise bill, so it makes sense to err a little bit on the side of overpayment when filling out your W-4.

If you overpaid, why would you wait until April 15 to ask for your money back if your biggest concern is not giving them an interest free loan? I filed in February and had my refund in about a week.

> why would you wait until April 15 to ask for your money back if your biggest concern is not giving them an interest free loan?

It's not always possible to file accurately that early.

A number of investment related tax documents don't come until March 15th at the earliest. Then you probably need to wait for your accountant to prepare everything, you review everything and finally you officially file it. For me personally this usually happens near the end of March. Realistically it can't be any earlier.

Also, if you're self employed chances are you're paying quarterly estimated taxes to avoid penalties. You're giving them money as early as a few months into the tax year. You also need to make sure you don't underpay or you can get penalties and you also owe interest. You either give the IRS an interest free loan by overpaying throughout the year or risk losing money.

It’s a perpetual 0% loan.

> withholding is set at a fixed rate at the beginning of the year

This is not correct. It's calculated per pay period. Please see IRS Publication 15 and 15-T.

This is the painful part about working jobs where you receive the bulk of your income in relatively few paychecks. You end up grossly overpaying on your taxes because they are essentially assuming that's the amount you receive every paycheck and withhold taxes accordingly. So if you work a boat load of OT every other pay period, and receive like $3k for the first half of a month, and $7k the next pay period, those $7k paychecks are taxed assuming you make $7k * 24 =168k each year, when, in reality you make $120k a year.

There's no good way around this either (to my knowledge). Other than maybe jacking up the number of dependents you have.

There is an easy way - reduce your withholding and then pay your taxes in a timely manner in the new year to avoid the underpayment penalty.

Yes, the standard withholding methods produce poor results when pay does not arrive evenly through the whole year.

It is possible for employers to use alternative methods. IRS Pub. 15-T sec. 6 has details on common alternatives and constraints.

I have no idea to what extent employers support any of these alternative methods. I imagine it's limited to employers where much of their workforce is overwithheld using the standard methods. One example might be a school district where teachers are only paid when in session.

You can update your W-4 any time you want.

It even notes on the form that you should update it if your financial situation changes.

You mention W-2, so I'm assuming the US.

The W-4 asks about things that change income like 401k contributions. If you think you'll itemize taxes (keeping in mind that the vast majority of people don't), there's also a space to put that amount so that you're withheld correctly.