It's tax season and preparers across the country are furiously entering numbers and completing even more forms. Unfortunately I have to ask, what's the hurry?
According to IRS Commissioner Rettig, we are to expect delays in processing and refunds. He goes on to say that the IRS is still processing a big backlog of 2020 returns. I can attest to the veracity of that because I have a client whose 2020 1040 has not been processed nor refund sent. They may have to rethink overpaying on preference to honing down on the exact or more exact amount of withholding. Over the years, I have had clients who use over withholding and higher than needed ES payments as a sort of savings account. Of course, it is not a savings account and functions as an interest free loan to the fed. Worse yet, the cash received back in form of a refund is depreciated so you gave $100 and got back $93. Shrewd!
I recommend making ES payments when required. Anyone who receives a W3 (regular employees) should review their W-4 and submit a new one to be precise about the amount to be withheld. It's a bit cumbersome but doable in a 10 minutes following the form instructions. So ask HR for a new W-4 as needed.
I do not recommend overpaying withheld taxes and relishing the possible refund as found money. If you over pay you do get a refund. But as said, worth less due to inflation's effect on purchasing power. Instead, open a separate isolated savings account and set aside whatever would have been an over payment at interest. Yes, interest is low, but the money is there for you to use so it ca serve as an additional emergency fund too. Then at tax time, you are free to withdraw your saved "withholding" on your schedule and not be subject to the vagaries of a way behind tax system.
ACTION PLAN: Never pay more in withholding than you must. Always keep your hard earned money nearby and when making loans to 3rd parties whether family, friends, businesses or the IRS get paid at interest to overcome the depreciating effect of inflation.
And now you know.
Best,
Donn Marier
DM-Your Own CFO