Are You Making Free Government Loans?
Did you receive a substantial refund from your 2005 taxes? If you did,
you are one of a large number of taxpayers who are giving Uncle Sam interest-free
loans. Granted, interest rates have been pretty low for the past few years,
but they are gradually increasing, so you might want to consider reducing
your withholding to the point that it more closely approximates your anticipated
tax liability.
Some taxpayers use excess withholding as a forced means of saving for
other annual expenses, such as property taxes and vacations. The same
result could be accomplished by turning the excess withholding into automatic
withdrawals for credit union or bank deposits where the interest earnings
will go into your pocket, not to the government. The larger the refund,
the bigger an issue this becomes.
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If you are concerned that you might end up owing a little
tax and Uncle Sam might hit you with an underpayment penalty, keep in
mind that there are safe harbor amounts that can be used to avoid penalties
even if you owe a substantial amount.
To avoid possible underpayment penalties, a taxpayer is required to deposit
by payroll withholding or estimated tax payments an amount equal to the
lesser of:
1. 90% of the current year’s tax liability, OR
2. One of the following amounts:
a. If the taxpayer’s AGI exceeds $150,000*, 110% of the prior year’s
tax liability.
b. Otherwise, 100% of the prior year’s tax liability.
*$75,000 for taxpayers filing married separate.
If you need to adjust your withholding amount or are concerned that
you might be subject to an underpayment penalty for 2006, then please
call our office for assistance. We are here to help.
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