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ONE OF MY FIRST employers allowed me to buy savings bonds through withholding from my weekly salary. It seemed like magic. Ever since, automatic payroll deductions have been an important part of my financial life.
My payroll deductions expanded to include my health insurance and my 401(k) contributions. It just felt good to me, kind of like the practice of regularly giving 10% of your income to the church.
On the other hand, payroll deductions are also how we pay taxes, which doesn’t seem like such a blessing. This culminates with the annual ritual of filing my income tax return. That’s when I learn whether I’ve withheld enough.
I’ve never used a preparer or accountant to calculate how much tax I owe. I prefer to avoid paying someone else to do something I can do myself. That’s my fallback position for many such chores. If I can do it myself, I will. I’ll pay someone for the harder things, like fixing my teeth or repairing my car.
Besides, when I do my own taxes, the government checks my work. If I make an arithmetic error, I get a letter from the IRS or my state’s tax department. It points out my mistake and informs me how much more I owe or—on a good day—how much more the government owes me.
To be honest, I’m not sure whether my do-it-yourself method has saved me money. If I miss a deduction to which I’m entitled, I’m paying an extra tax for my stubborn independence.
I started feeling more confident that I was getting my fair share of all the tax breaks when I began using TurboTax. The software asks a lot of questions that I’d never thought about to help me explore possible ways to save on taxes.
Yet there’s still a problem: TurboTax won’t challenge me if my entries are wrong. Luckily, whenever I’ve misunderstood a question—and seen the resulting taxes I owe—I’ve been able to backtrack and correct my misinterpretation.
In the end, TurboTax tells you how much you owe or the amount of your refund. I find it unsettling, wondering whether the taxman is going to demand more of my income. So far, I’ve never been in a position where the amount demanded has exceeded my ability to pay. Still, tax season is a stressful time for me and, I imagine, for many others.
This stress leads me to prefer to be owed a refund rather than having to write a check to the Treasury. I know, I know, I’ve heard it many times: Why make an interest-free loan to the government? Just pay Uncle Sam what you owe and no more. In the meantime, use your money to your own advantage. I get it.
It’s just that I hate paying for anything. Writing a check for underpaid taxes is something I want to avoid. I wish I could justify my feelings, but I can’t. When I calculate my tax return, if money is due to me, I’m relieved. I give the government my bank information and, magically, the money appears. I can relax for another year. Over the years, most of the credit for this relief has been due to my faithful ally—automatic payroll deduction.
I’m retired with several streams of taxable income. I massively under withhold taxes until December. Why let government have use of my money all year long? Every odd year’s December, I pay the feds a huge amount straight from an IRA – usually an extra couple hundred which obviously comes back to me as a refund. Every even year’s December, I send the feds about 92% of what’s due -again straight from an IRA. My accountant tells me that money from an IRA to pay taxes is treated by our government as coming in throughout the year regardless if you send it lump sum. And the 92% number is because I don’t want to underpay more than 10% and then be forced to pay quarterly. (I did my own taxes with a stubby pencil until 1990 when I bought a computer and used Turbo Tax (and its precursor) until they wanted to charge extra for capital gains forms. Then I changed to H&R until I acquired a rental house and didn’t want to learn the depreciation game.)
FreeTaxUSA aka TaxHawk is better and cheaper than TurboTax, and has the benefit that you won’t be supporting Intuit’s lobbying efforts that keep the US’s tax regime in the stone age.
No offense intended, but allowing the IRS to do cash flow and budget management strikes me as one of the least desirable outcomes for financial planning. It’s not that hard to track income and use the prior year’s TurboTax or other software to do a pro forma for the current year to keep abreast of current year tax liabilities.
This year we owe the IRS a lot (due to large Q4 Roth conversions), and I’m thrilled to have paid in advance (mostly Q4 estimated tax) only enough to satisfy the 110% safe harbor. The IRS will get the rest on April 12th, and I’m earning 4+% on that money in the interim.
To each his own, I guess.
My income consists of Social Security, a modest amount of interest on savings accounts, and distributions from my traditional IRA (usually a little more than my RMD). I take the IRA distribution near the end of the year and have an amount withheld close to what I expect to pay in taxes. I typically have a small refund due, but I just have that applied to the next year’s taxes.
I share the writer’s prejudice against having to write a check for taxes when he files his return. I like to know my taxes are fully paid and I will get something back. But I’ve had one experience that suggests that I should plan my taxes to do just that – owe a little rather than expect a refund.
My state, Maryland, made a very stupid error three years ago and somehow missed one of my estimated tax payments. It then recomputed my taxes and said it was reducing my refund by quite a bit as a result, and sent me a conclusory notice that did not explain why it did what it did. I quickly caught on to the error and knew exactly why it happened – a lazy or hurried mistake that was very clear. I immediately wrote a letter seeking a correction, sending copies of the checks, front and back,to show that the estimated tax checks were both received and cashed.
The state failed to respond, and when the state took my money, I had to file an appeal. After submitting the same paperwork to the appeals officer (with copies again to the state), along with a long explanation of the error, the state strung me along and kept my money for more than another year until the hearing date, when the hearing officer finally told me – on the telephonic hearing – that the state was returning the excess money to me, and it should be in my bank account. I suggested continuing the hearing so I could confirm that actually was the case, and a week later I could finally verify that the state gave up and returned my money.
This told me that I should not give the state the option to sweep up all or part of a large refund when it got too aggressive and made an error. I also feel badly for taxpayers in similar circumstances who lack the time, money and understanding to fight for what is theirs, and who have to abandon a fight that they should never have had to endure in the first place, when they are right to begin with and victimized by administrative error and overreach.
I suspect the process is intentionally designed to be burdensome to deter appeals, and to allow the state to prevail this way in most appeals. If an appeal is excruciatingly hard to pursue, people will just give up. This whole experience really soured me on Maryland tax collection processes. And I sense I am in the middle of another such snafu from my most recent tax year. Here we go again.
(In contrast, I have never had such an experience with the IRS. When I am wrong there, I get something that helps me understand why, and I have to agree that I was. On occasion, the IRS has even changed a return in my favor, so I know it is trying to be objective.)
I have had the IRS make errors (in both directions), but at least they paid interest when they made a mistake.
(Though I haven’t had them take as long as your example, and I didn’t have to do much other than a letter and a phone call, etc. I think they’ve taken 6 months at the longest to resolve their mistakes)
Ooooo those taxes!
My return is like a book and my tax guy miss scheduled my appointment last year so did everything with no fee and gave me a gift card to appease me.
I was looking the return over and as I have some rentals, he deducted a professional fee of $500 for each which is reasonable.
This is to say, we all have different financial situations and there’s no ‘right’ way.
There can be a middle ground between paying for tax return preparation and doing it yourself.
I refer to the IRS’ VITA program where IRS-certified tax counselors (working in partnership with a non-profit or government entity) do returns without charge. A common instance of this is AARP’s TaxAide program. There’s no need to be elderly or a member of AARP, though certain income situations are outside the scope of the training these volunteers take.
When I used to prepare payroll for a small company, I tried to end up owing the IRS less than one dollar because if I owed less than $1, I didn’t have to pay it. It worked one year when I was really low paid and basically broke. Now that I’m retired and have resources, we don’t have any taxes taken out of any of our income. We make estimated Federal and State taxes quarterly, just enough to prevent a penalty if we underpay. Yes, quite often we owe taxes in the end, but I rationalize that as at least we were making money on the taxes we underpaid. The hardest check we ever wrote was the deductible on a hail damage claim on our house. That hurt more than sending the IRS money.
I’m concerned to IRS is going to get impossible to deal with.
In December and early January, I sent two estimated tax payment checks. Three weeks later, they hadn’t cleared. I emailed my accountant who said to wait another week or two until a return-to-the-office order kicked in. The checks cleared the next week.
Now agents are being fired. Will there be enough to handle the workload and what will be the morale of the remaining employees? As automated computer systems are put online, you can be sure they will be amateurish. They won’t address any but the most cookie cutter simple and there will be no accounatability or human who may be able to help. The current admin might even contract with a foreign call center!
In addition to EFTPS (as referenced by Harry C. below), you can just go to IRS.gov, click on ‘Make a Payment’, and follow the instructions to validate yourself and make payments via ACH.
Just say NO to checks, which can be stolen, misdelivered, lost, etc. It’s not worth the anxiety to get a small float.
But with ACH, the gov’t can take as well as be given.
And what about hackers or newly appointed?
Why don’t you pay the IRS through the EFTPS system (Electronic Federal Tax Payment System)? I’ve used that system for decades and never had a problem. Never wrote a check, never had to wonder if the Post Office would get it there in time. I just tell the system what date the IRS can take my money and the IRS takes it on that date.
In grad school, one day I went to an ATM and it wouldn’t give me money. I went to the bank and they told me that the IRS had frozen my accounts. This was over 30 years ago when credit cards were not ubiquitous; not having access to cash was a problem.
An accountant had a storefront in the ground floor of my building, so I went to him. He straightened out the issue (which wasn’t my fault) and told me that if he did my taxes, that type of service was included in the fee. So I hired him until I moved.
Then I went back to doing my taxes and my partner’s. After a few years the IRS then came at me for something I did wrong, or maybe they screwed up, I don’t recall, and I went to a local accountant. He’s done our taxes every since and also dealt with problems the IRS claims we’ve had. He screwed up big time in 2020 when most of his employees refused to return to work, but he completely fixed the problem.
He did things we never would have done, like prepare our taxes three or four different ways (unmarried with kids meant we could move them back and forth and change head-of-household as my partner’s income increased from less than mine to more than double mine, and there was the year I paid off our mortgage with a lucky stock pick) to get the best tax benefit.
Dealing with the IRS is something he takes care of when it needs to be done. Well worth the fee (not all of it is deducted).
I do use an accountant to file my taxes, but I do the work, collating receipts, preparing spreadsheets, etc. Before he retired my long-term accountant told me he loved doing my work; it was a joy compared to those who brought in shoe boxes at the last minute.
I could have filed myself, but as a business owner one of the benefits was having a professional to deal with any IRS questions, etc. A few years ago the State of Illionois decided to run extensive audits of small businesses to maximize tax collections. Had I not had an accountant, it is my business location in which the auditor would have camped out. As it was, they spent a week in a conference room at my accountants. They would periodically make requests for certain records, which I sent to them. Had I not had an accountant they would have been in MY office, disrupting the business and making endless requests.
That is the only audit I’ve ever had, and I prefer to keep it that way.
I do run all of my numbers through a version of Quicken, with supplemental spreadsheets.
TT is how I got my start doing taxes. It’s great software with just a couple caveats. One is that it’s accuracy relies on the user to answer the interview questions properly. The other is that the last time I used it, which was many years ago, it did not have the ability to do a married filing joint versus separate comparison that integrated both the federal and state tax returns.
I had a client who was losing $1000 each year as a result, and those returns are not amendable. There are other things to consider regarding the MFS filing status as well, and I’ve not seen any do it yourself software that can properly sort it all out.
I have taxes withheld from Social Security, my pension and when I take an RMD I withhold enough to cover than and taxable dividends, interest and capital gains because I too dislike paying and delight in a refund even if it cost a bit of interest.
Like some of the prior commenters we also prefer to have taxes automatically withheld. Now fully retired, and having no pension, Social Security voluntary withholding is our only automatic option. Adding Social Security benefits, estimated unearned income, and planned IRA distributions, our taxes are estimated as 12% marginal rate and 5.5% effective rate.
Social Security voluntary withholding has two annoying features: 1) the rate cannot be set using your online Social Security account; and 2) the withholding rate can only be one of the marginal income tax rates, currently 7%, 10%, 12% or 22%.
By playing around with the amounts of our two Social Security benefits and setting one to withhold 12% and one to withhold 7% we were able to dial-in our total annual withholding to only about $800 over what our estimated obligation will be.
To avoid sending the W-4V forms with our Social Security numbers by mail, or email, and to avoid an in-person trip to a Social Security office, we FAX’d the forms directly to our local Social Security office. Expect about two months for the rate to take effect.
The withholding percentage is not applied to your total Social Security benefit, it is applied after the Medicare part B premium is deducted.
We have 0 withheld. I calculate and make quarterly estimated payments based on our income for each period via IRS.gov, taken directly from our checking account via ACH. No forms, no muss, no fuss.
In the spirit of “filing season”, please be sure to get an IRS Filing PIN. You’ll need an IDMe account but it’s easy to establish. Start at the IRS website and follow the links/instructions. IRS filing fraud is a big issue and more likely to occur if you wait to file till later in the season. The PIN should help lessen the chances of you being a victim.
As far as withholding, at the beginning of the year, I calculate the tax that would be payable if I max out the 12% bracket. For 2025 MFJ, that’s $11,157 or $930/month. I then adjust my withholding from one of my monthly annuities (pension, SS, etc) to that amount. I then see how much room I have over my known income to that cap and do a Roth conversion in that amount. So my withholding now covers my income including Roth conversion for the entire year.
If I have unexpected income during the year, I do a quick back of a napkin tax calculation and adjust my withholding the following month for the tax due (now at 22% plus self employment plus state). A couple times during the year I’ll do a quick income check to make sure interest and dividends aren’t throwing off my original estimates.
Finally, I keep all our withholding to one annuity, ie., my pension, and have nothing withheld from SS or my wife’s small pension. Just makes things easier.
Lastly, I never want a large refund. Not so much for the interest free loan issue but rather if there is some type of fraud that prevents our return from being accepted, I don’t want to be waiting for my money. I’d rather be owing them while they take months to figure out and resolve the problem.
Good advice. My first return after my retirement we ended up with a $2500 refund. Several months went by without a check. Calls and letters to IRS went unanswered or unreturned. Our CPA reached out as well. Long story short, it took 3 years and Congressional help to get IRS to reach out to us. Even then I spent 2 ½ hours on the phone verifying my identity with an agent going over the last 10 years of returns, some line by line. What a pain in the internal “rectum” service that was.
When I inquired with my tax person, who formerly worked for the IRS, it was not recommended to get the PIN. She already had a few clients whose identity had been hacked. She is not getting a PIN herself.
Not disagreeing, but just passing along that a PIN is not 100% safe.
This was my first year using the tax filing PIN, just to add another level of security. As Dave mentions, we’ve also used TT software for many years. I noted that this year, I had to input additional information such as our drivers license info, apparently to add a bit more security against fraud.
FYI: Be aware that the self-chosen signature codes that filers enter to authenticate their tax return electronic signatures is not the same as the yearly filing PIN. Somehow, I blew through the section during data input where the PIN number(s) should have been entered, even though I was watching for it carefully. And yes, 10 seconds after I hit the “go” button to e-file my returns, I realized that I forgot the PIN codes and as expected, my Fed return was rejected (and, consequently, so was my state return). I was frustrated that I might have to pay to refile my returns with the PIN info now added. Fortunately, it was a simple process and zero added cost to refile. Both returns were accepted in about12 hours. Whew!
I loved the ease of payroll tax withholding during my working years. Now I adjust withholding on quarterly withdrawals from my 401b to cover taxes on all income. As a self-preparer, estimating the upcoming tax year is straightforward using tax software (HR Block). Any overpayments just become pre-payments of first quarter estimated tax. The AARP’s tax calculator is also a great tool, and I use it several times a year to make sure my federal withholding is still on track.
I have no problem overpaying my income taxes although I try to make the refund less than one thousand dollars. I have used TurboTax for decades and feel it is worth every penny (< $100). I just received our ‘24 refund last week. This year per TurboTax it took me 1 1/2 hours to complete. This year was the first I completed a Roth conversion. My goal was to convert to the maximum 12% rate. I overshot it ($94,300 for married filing jointly) by just > 1K. I had read though that it is better to overshoot by a bit to make sure you don’t leave any of the lower bracket rate on the table. I was surprised last year when I researched how high the 12% bracket income limit was. I guess because my wife and my combined total income was rarely >100K.
I’m not sure I agree with overshooting, as typically (at least for me and my wife) the next marginal rate is 27% due to long term capital gains and/or qualified dividends getting pushed up from 0% to the 15% bracket.
Although for you, David, IIRC you have carryover losses to wipe out any capital gains.
Dave, I am also a big fan of automatic deductions, especially to support early career savers. And don’t feel too bad about preferring a refund. Based on my experience preparing 100s of tax returns, and with friends and family, most people prefer a refund. I shoot for owing about $1,000, but I still do’t enjoy writing the check. One year I messed up and owed about $4,000. The loss aversion with writing that check was quite painful. Happy tax season.
I keep trying to make the balance due = $0. I have never succeeded.
Jeff, in 2022 I owed $37. That’s the best I’ve ever done.
That’s a win!
If you’re worried about tax fraud, there’s a virtue to owing taxes with your return, as the late Julian Block explains here:
https://humbledollar.com/2018/04/an-ode-to-owing/
Yes. Some number of years ago there was a large number of fraudulent claims and that solidified my plan of always owing $1k or so (or more on those happy years where my income is significantly higher than the previous so just aim to prepay 100% of last year’s amount).
With how many people blow their “refund” badly, I’ve wondered if people would spend it better if it wasn’t taken out all year long, though I don’t recommend bad savers to owe too much, since they might already spend it before April comes around.
But it is always mystifying to me how many people don’t understand tax brackets and refunds.
Yes, if there is a problem with your tax return it can take a very long time to receive your refund. Better to owe a couple bucks in my opinion.