Few of us can really say we enjoy filling out our tax forms each April. One bright spot in this process is if we have a refund coming rather than having to write Uncle Sam a check. This month we’ll take a look at whether tax refunds are really such a good thing after all.
When interest rates were around zero, it really didn’t matter much whether you held your money or the government held it. However that’s changed. Now it’s easy to earn 3.5-4.0% through an online saving account. Even beyond that, it’s better for you to have this money to pay off high-interest debts such as credit cards throughout the year or to invest it to meet your financial goals.
What if I simply spend money as it comes in, but have a really hard time saving it? Well, you’re far from alone with this challenge. One proven technique to help with this is to have a portion of your paycheck automatically deposited in a savings account (like the online account we talked about). That way, you never see the money and it’s not as tempting to splurge on unnecessary items. Naturally, you’ll still need to apply this money to your credit card debt and other financial goals, but as least you’ll have a pot to work with.
Okay, so it’s better to not overpay my withholding (or quarterly estimates), but how do I avoid penalties for underpaying my estimated taxes. The IRS answers this question pretty simply. They say that you may avoid the Underpayment of Estimated Tax by Individuals Penalty if:
- Your filed tax return shows you owe less than $1,000 or
- You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.
They even have an online withholding calculator that can help you determine the proper withholding for the current tax year.
States also have underpayment penalties. Colorado, for example, says that you are subject to an estimated tax penalty if your current tax year’s estimated tax payments are not paid in a timely manner. The estimated tax penalty will not be assessed if the Colorado tax liability is less than $5,000. The required annual amount to be paid is the lesser of:
- 70% of actual Colorado tax liability or
- 100% of preceding year’s Colorado tax liability
We’d be happy to discuss the best way to apply excess withholding payments to your situation, or to discuss any other financial matters, in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.