Who's Using Your Money

Winter, 2009

According to government information, refunds on the average are getting larger each year.  If you overpaid, does it make sense to let the government have an interest free loan of your money throughout the year? If you are experiencing federal refunds in excess of $500, it's time you examine your withholding schedule on file with your employer. If you need assistance in preparing your new W-4s or in computing your estimated tax, give us a call.

If you underpay, you could be faced with Federal and State underpayment penalties. These penalties are not deductible. Again, proper planning can avoid penalties. One method of avoiding these penalties is to pay tax timely during the current year equal to the previous year's tax liability unless your adjusted gross income was over $150,000, then in order to use this safe harbor you must pay 110% of your prior year tax liability. The problem with using this method is that you could end up grossly overpaid or underpaid and in for a surprise when filing your tax return. Our recommendation is to calculate estimated taxes for the current year, make minimum payments to avoid underpayment penalties and invest or plan for any taxes that will be owed at filing. If your situation changes for any quarter, recalculate your estimated taxes and plan accordingly. Again, if you need assistance in making these computations we will be available to help.

Taxpayers are required to have 90% of their taxes paid throughout the year unless the safe harbor rules apply. Tax withheld from wages, pension, interest, dividends, etc. are considered withheld evenly throughout the year whereas estimated payments are considered paid when made and are due quarterly throughout the year. This creates a planning opportunity to increase withholding closer to year end and avoid underpayment penalties. 

Our firm always takes the position that you should pay what is necessary to avoid penalty and plan for taxes due. Remember, we can assist you in estimating tax liabilities for estimated purposes or in revising your W-4s. An interest free loan to Uncle Sam is a poor return on your investment. It's your money not THEIRS.