1. Set up my withholding to equal or exceed 110% of prior years actual tax paid.
2. Forget about it for another year.<<
Good when income is level or increasing.
It doesn’t work for us this year because last year was a high income year and this year will have lower taxable income. - vkg
It still works.
But I get what you are saying. Why give Uncle Sugar more than is necessary to meet your estimated tax bill? If I am eligible for a refund, I simply roll that forward to apply to next years tax. And if the next year is also a refund, I roll that forward too. The refunds keep accumulating year over year. But when they reach $5,000 or more, then I will usually take the refund and start over.
What do I do with that $5,000? I put in my credit union where it languishes earning a big 0.25% annual interest ($12.50). So right there is why I say it still works. With interest rates being abysmal as they they, the opportunity cost for over withholding is insignificant.
But you are literally correct. I am giving Uncle Sugar free use of my money. But the peace of mind and ease of process is worth $12.50 to me.
What do I do with that $5,000? I put in my credit union where it languishes earning a big 0.25% annual interest ($12.50). So right there is why I say it still works.
I would point out that you can buy up to $5,000 in paper I-bonds with your tax refund. Given current inflation, that would certainly earn you more* than 0.25% for the next year, when you would be able to cash them out, albeit with a 3 month interes penalty if cashed in the first 5 years.
*I-bonds purchased this month will pay 7.12% for the first 6 months and probably over 8% for the following 6 months, depending on exactly what the CPI-U rate for March (released on April 12) is.
I am giving Uncle Sugar free use of my money.
Plus, you are missing out on the opportunity to get Uncle Sugar to pay you on the money you are letting him hold.
Not just loaning the free money with so much tax return fraud I don’t want taxing agencies to have too much money over what I owe them.
Many of us have our information on the dark web, thanks to the Equifax breach. We always try to owe the gov’t to make at least one thing less tempting to try to steal.
We always try to owe the gov’t to make at least one thing less tempting to try to steal.
I didn’t plan on owing the government as much as we did this year.
Still bruised about the investment that did a 30% dividend mostly in December 2021 with a corresponding drop in value. It’s history didn’t predict that type of dividend.
I didn’t plan on owing the government as much as we did this year.
Still bruised about the investment that did a 30% dividend mostly in December 2021 with a corresponding drop in value. It’s history didn’t predict that type of dividend.
Those drive me crazy too, with our Vanguard Healthcare Fund often doing this to us every year. Those funds that spit out capital gains without our selling are the first on the chopping block when we start harvesting gains for income. We are selling a rental property this year, assuming it goes through, and the taxes on capital gains are surprisingly small given we have no other income beyond investments. We have held these funds so long that there is a ton of gains, but we look forward to cashing them in in a tax advantaged way and buying ETFs instead.
I never really understood the power of capital gains taxation until someone posted this link to play around with your taxes. Really helped me visualize our options.