Paying too much to the tax man? In 2003 and 2004, taxpayers overpaid on their tax returns to the tune of 29%, according to Internal Revenue Service data.

This has spurred refunds above $200 billion a year. The final tally for the 2005 tax year is not yet available, but the average refund so far is $2,423, which is 4% higher than last year.

The bigger tax refunds are due to taxpayers over-withholding nearly twice the traditional safety margin from their paychecks to avoid a year-end tax payments.

While bigger refunds and the avoidance of having to pay more at the end of the year can be good for Americans, it's also good for the federal government which earns interest to the tune of $10 billion a year (averaging $100 per tax return).

Leonard Burman, co-director of the Tax Policy Center in Washington, declares "The deficit is a little smaller because of this voluntary tax."

The increasing use of tax credits and deductions inflicted the jump in overwithholding.

Changes in tax rates automatically revise withholding levels, but changes in tax credits and deductions do not. Workers getting 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, up 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.

Tax credits are available for a dozen purposes, including college education, adoption assistance and child care expenses. The portion of returns claiming at least one credit rose from 13% in 1995 to 31% 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 a year because they benefit most from tax credits. Many low-income families obtain refund anticipation loans, which typically cost $100 or more, to get their money about 10 days earlier than from Internal Revenue Service.

Although over-withholding can result in a bigger refund, Americans could put that money to better use, such as earning interest for themselves instead of giving an interest free loan to the government. Instead of paying more in withholding, pay less and put the balance into an interest bearing account.

But many people enjoy getting the bigger refund each year, even if it means they could have saved more during the year and earned interest. And, because tax filing is so complicated Americans prefer to play it safe and opt for the bigger refund.

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