I have a number of tax clients cross my doorstep or contribute to my inbox throughout the course of a tax filing season. They come with various perspectives and attitudes about what the result of efficient tax planning should be. Of course, I have those who owe more than they can pay, those who receive huge refunds and those who virtually break even when all is said and done with the filing of their annual individual income tax returns. I felt impressed to discuss the topic of which result is preferable in today’s blog post.
Let’s start with those who owe much more than they have the capacity to pay by the filing deadline. This is the worst case scenario in my book and a sign of bad tax planning or no tax planning. Many of my new clients come to me with situations such as this and I help them recover from that and plan better for the future. Most all of my existing clients don’t find themselves in this situation because we focus on prospective tax planning at Weech Financial. We choose to avoid the situation of stating to our clients something like “it would have been good if we had . . .” sometime in March or later during the filing season. That is avoided by proper planning during the tax year. Any of my clients who end up in that situation likely transacted some business that had large tax implications without discussing it with me first.
The next group are those clients who insist on receiving large refunds from their federal and state returns each year so that they can “go to Disneyland” or something of that nature. When I try to explain to them that allowing the government to hold their funds interest free throughout the year is not all that wise, they often confess to me that if they arranged their withholding so that more funds came into their hands during the year that they would waste it in meaningless spending. To them, it is a forced savings plan with no return on their investment. I understand where they are coming from, but still disagree with the efficiency of the logic. I would rather teach them how to save on their own rather than utilizing Uncle Sam to hold their money. What is ironic is that when I suggest that they alter their withholding to have less taken out and allow me to hold their funds until early the next year at which time I will give it all back to them without interest, they are not interested. That is interesting since that is exactly what they are doing with the government and they are fine with it.
The last group either thinks like me already or I have convinced them that the perfect situation is to plan their tax situation such that they break even or owe less than $1,000 with the filing of their returns. This result neither puts an onerous burden on them to come up with large sums of money at tax time nor allows the government to be in custody of their funds for any part of the year. In addition, it avoids any estimated tax penalties which can be assessed if too much is owed with the filing of the return. The IRS and state governments demand that taxpayers pay their tax liabilities consistently throughout the year and not wait until the end of the year to pay. The estimated tax penalty rules are in place to punish those who do wait to pay the bulk of their liability at year-end. Of course, if a taxpayer is unable to pay their remaining balance due by the April deadline, they will also face late payment penalties in addition to the estimated tax penalties. I am generally not in favor of paying penalties when it is not necessary but I do have some clients who don’t mind paying the estimated tax penalties because they believe that they can produce a larger return on their investment with the money in their hands than the penalty bite takes out of them.
The filing season that we are in is too late to plan for last year’s taxes. In order to implement efficient tax planning, I must meet with my clients mid-year and/or in late October or November so that needed adjustments can be made before the year is over. Many of my clients will attest to the value of meeting for these planning sessions. If you are not a current client, feel free to contact me for a complimentary initial consultation.