The Tax Withholding Game

    I’m starting to think that all of these newsletters and bulletins are simply annoying. Lawyers, doctors and Indian chiefs all seem to have a newsletter that shows up in my email just like this one does in yours. I know most of you have the good sense to delete it without even casting a single glance at it. You should be comforted by the fact that I do the same thing. But I will admit that every now and then a notice of some kind arises that is worth repeating. This one was from a friend of mine who is an accountant. He was very straightforward. Being an accountant he knows facts and figures. He said the year 2019 is half over. I frankly had not given much thought to that spinning of the earth around the sun but realized that he was right. Before you know it, 2019 will be history. Now here is the point he made. If you are fortunate (or perhaps unfortunate) to be working for a wage where your employer is withholding taxes for your next year’s tax return you may want to visit your company’s accountant for a test drive of what your tax situation may look like for next April. This past April was a disaster for many, my accountant friend says, because they were happy that their net pay went up but did not realize that their state and local tax deductions went down. That left them in the lurch and short some to the IRS at tax time. So wise is the employee who makes an effort to increase his withholding to our friends in the Internal Revenue Service. Or does it? You are smart enough to know, I am sure, withholding means you are making an interest-free loan to the United States. It may be patriotic but makes little real financial sense. The best position a person could be in is owing taxes and not incurring an estimated tax penalty for failure to cough up enough during the year. That is making your interest-free loan to the United States as small as possible. But that of course would remove the joy of receiving a refund check next May or June when who have learned that you have “overpaid” your taxes. To ensure that you get the withholding calculation correct the tax law provides an estimated tax penalty (sort of like a non-deductable interest charge) which you can also review with your accountant. The other piece of information that my friend supplied was that withholding is treated as being spread equally over the entire tax year. So if you have a bunch of withholding toward the end of the year it will be treated as if it came in during the year saving you from that ugly estimated tax penalty and also thereby reducing the period you are in the interest-free-loan-business to the USA. So there, you decide whether that was a useless annoying bulletin or not. But it won’t matter anyway if you deleted this before you read it. I’ll never know.