By Rob Schulz
I don’t mind paying income taxes, but it’s not my favorite thing either. It’s such a strange process. Every other bill I pay is pretty cut and dry. I get an invoice showing what I owe and a due date for when I need to pay it. Pretty simple.
But the IRS has their way of doing things. They want their money way before we ever know exactly how much we owe them. They collect it in the form of deductions from our paychecks and quarterly payments. A year later, we complete our tax returns and determine whether we owe the IRS more money or if they owe us a refund.
You can adjust how much is taken out of your paycheck by updating your W-4 with your employer. Self-employed folks can make quarterly payments voluntarily throughout the year based upon the amount of tax you paid last year.
For most people, their taxes don’t change a whole lot from year to year so hopefully, your deductions and quarterly payments match up closely with what you owe. But many taxpayers purposely send too much money to the IRS over the year so that can get a nice fat refund check at tax time. Others minimize their deductions because they prefer to pay the IRS at the very last minute.
Of these three philosophies: pay as you go, overpay or underpay, which is the best?
I think paying as you go, trying to match up what you pay during the year with what you expect to owe at tax time is the best course of action. For those who overpay, they are using the IRS like they are a bank. The problem with using the IRS for savings is that those funds only become available when you file your return. For the rest of the year, those funds are not available to you if you need them. Would it not be better just to open a savings account and save your money there? I think so. That way, you have more control and access to your money.
As far as putting off the taxman until tax time, there can be penalties associated with delaying your payment like this. Thirty years ago, you could argue that keeping your money in the bank was better off, even if there was a chance of a small underpayment penalty. That’s because you could earn 4 percent to 6 percent in money-market or short-term CDs until tax time. These days, we can’t make anything on our money short term so we might as well send it on, in my opinion.
To me, taxes are so much easier when I keep up with my deductions and quarterly payments. This way, I’m not scrambling and stressing out over the bill when I complete my return.
What do you think? Does one of the other options work better for you?
Rob Schulz is a local Certified Financial Planner and author of “Thoughts on Things Financial: Your Guide to a Chaotic Money World.” He can be reached at firstname.lastname@example.org. Buy his book here: https://www.schulzwealth.com/book/
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