Always Having to Pay

[Corduroy Frog]

I'm sure many of you have heard the same story.

Some clients ALWAYS have to pay...never get a refund. Client speaks up with an air of genius: "I don't want to let the gubbermint use my money interest free for a whole year, so I keep the money for myself." As if we should admire him for his financial prowess.

Funny, I've never had a single one of these "genius" clients have any interest income to report. I believe the threshold for a bank to issue a 1099-INT is only $10.

Go figure...

[mcb39]

I have a client who purposely has no Federal taxes withheld so that he can use the money all year.  What part of "penalty" don't these people understand?

[Abby Normal]

2 hours ago, mcb39 said:

I have a client who purposely has no Federal taxes withheld so that he can use the money all year.  What part of "penalty" don't these people understand?

It's more of a lifestyle than any financial logic. They're just being contrary and childish, and they're willing to pay the price.

[Lee B]

We all have clients that think differently and have different priorities than we do. So what

[Medlin Software, Dennis]

I make all my tax payments/withholding in Dec. I am within 500 either way. I have interest income. But, a significant % of my income is on Dec. AND I understand the rules, such as withheld on or before Dec. counts for the entire year. Just part of the game we all make money playing.

Use/cost of the money has a value even if there is no interest collected as described in the OP. Many fail to account for that.

[Sara EA]

I had a self-employed client who owed in the five digits every year.  The first time I prepared his return I dreaded telling him he owed something like $20k.  He didn't even flinch.  He said he makes better use of that money in his business during the year and the profits more than make up for the interest and penalty.  He had figured out what was best for him.

I like Dennis's idea of having all the withholding in December.  For clients who take their IRA distributions in December, they could have their year's taxes withheld and not bother with estimates.   Now that banks actually pay decent interest, putting the estimate money into a savings account could yield some profit.

I usually pay all of my estimates at once in April since I make most of my income in the first quarter and have the cash.  I might rethink that strategy.   

 

 

[BrewOne]

don't know if anyone else has experienced this, but I had a number of clients in the past two years whose wage withholding dropped and they told me they didn't change anything at work.  Not knowing what their payroll department is up to, I usually advise an additional $ amount based on how often they are paid, rather than try to rework a W-4.

for retirees who owe, I usually print out a W-4V for them to file with Social Security.  Although not ideal (often 12% is too little and 22% is overkill), it is an easy method of getting more withheld.  The State of Florida used to have a surprisingly simple W-4P form but that went by the wayside.

But sometimes all we can do is point out how much they are paying in interest and that it is currently at 8%.  You can lead a horse to water...

[Abby Normal]

18 hours ago, Sara EA said:

I had a self-employed client who owed in the five digits every year.  The first time I prepared his return I dreaded telling him he owed something like $20k.  He didn't even flinch.  He said he makes better use of that money in his business during the year and the profits more than make up for the interest and penalty.  He had figured out what was best for him.

I like Dennis's idea of having all the withholding in December.  For clients who take their IRA distributions in December, they could have their year's taxes withheld and not bother with estimates.   Now that banks actually pay decent interest, putting the estimate money into a savings account could yield some profit.

I usually pay all of my estimates at once in April since I make most of my income in the first quarter and have the cash.  I might rethink that strategy.   

 

 

Several points. The IRS interest is deductible but the penalties are not, and IRS interest rates are now higher than banks are paying, especially after paying taxes on the interest income.

If he borrowed on a line of credit, all the interest should be deductible and the interest rate should be about the same as what the IRS is charging. And if cash flow is good, you can even put expenditures on a credit card and pay it in full every month, for a short-term interest free loan.

Bottom line is, you need to crunch the numbers to see what is best.

[Sara EA]

Where is IRS interest deductible?  It is not an "ordinary and necessary" business expense, and for an individual taxpayer it's personal like with a credit card.

[Catherine]

I had an elderly client, gone these many years now. He had interest from a dozen or more different banks every year, chasing interest on 1-year CDs. His great joy and glee in life was calculating (by hand on paper!), and paying, his estimated taxes such that he owed less than $25 in April, each to the state and the IRS. But always he wanted to owe and never overpay into refund. I got a real kick out of him and he (and his wife) were lovely to work with. 

[Abby Normal]

13 hours ago, Sara EA said:

Where is IRS interest deductible?  It is not an "ordinary and necessary" business expense, and for an individual taxpayer it's personal like with a credit card.

It could be deducted on a Sch C as ordinary and necessary, since they're essentially borrowing the money from the IRS to fund their business. If line of credit interest is deductible on Sch C then this is just a substitute. Facts and circumstances apply.

[Sara EA]

You would have to do interest tracing.

[mcbreck]

On 5/4/2024 at 8:13 PM, Sara EA said:

I usually pay all of my estimates at once in April since I make most of my income in the first quarter and have the cash.   

 

I do the same thing. Being 100% responsible for my own paycheck, I was always worried I'd get sick / injured / stock market would crash and wouldn't have excess cash in September or January. When I had the funds in April, I just paid everything for the year and eliminated that risk. I never had a car loan or credit card debt either because I wanted to keep my cash needs low just in case. Also in January I made my retirement account contribution for the next year so it was invested early.

[joanmcq]

I have withholding from my RMD so if I owe anything, I just pay when I file.  I file in March usually so there isn't any interest.  I rarely owe much.

[mcb39]

On 5/5/2024 at 9:06 PM, Catherine said:

I had an elderly client, gone these many years now. He had interest from a dozen or more different banks every year, chasing interest on 1-year CDs. 

I, personally, chase interest on short period CDs.  It is fun and adds spendable cash to our meager retirement income.  My tax and accounting business pays for itself and purchases the CDs.  Win, win!