The traditional financial planning and tax management strategy is to minimize tax withholding and estimated tax payments throughout the year. Now with interest rates so low and the economy generally on the rise – meaning that actual taxes are more likely to be higher than estimated – it may make more sense to over withhold estimated taxes. An editorial by Bud Hebeler in today’s Wall Street Journal explains more on this topic.
First, this strategy reduces the chance that you will owe a penalty for underwithholding. I find that an increasing number of my clients now pay this penalty at tax withholding time. The penalty can be easily avoided simply by boosting payment throughout the year.
Second, you have your extra cash held by the United States government for a short term with automatic delivery scheduled next May. In this negative interest rate scenario, large investors throughout the world are actually paying for this privilege. Sure, there is no interest paid but you could certainly do a low worse in a volatile market.
Third, extra tax withholding through payroll or quarterly estimated payments is a forced savings vehicle. This is a tool known and well used by lower income taxpayers for year but seldom used by more affluent or self-employed individuals.
Boosting withholding is easy but the specific procedure varies depending on your situation. I am pleased to have a one-on-one discussion and even run an estimated tax computer simulation if necessary to project the results.