Use My Money???

[Snaggletooth]

I hear this from a couple of my clients - and I'm sure you've heard it too.

Client: "I sure don't wanna pay anything!! I hope you can pull it off.... {time passes for me to calculate...]

Me: "You are having to pay $12,000, including $950 in interest and penalties. Shouldn't you make quarterly payments?"

Client: "Well I really don't want the government to use my money all year INTEREST FREE when I can use the money myself."

Yep-most of you readers can identify with this from a few clients. They want you to congratulate them on how smart they are!!!!!

Funny thing about these guys. I look at their 1099-INT or -1099-DIIV, and NONE of them have more than $15 to report.......

[Rapid Robert]

For quite some while in the recent past, the interest rate was only 3% on underpayments for individuals. During that same time, the stock market was returning a lot more than that. Unrealized capital gains wouldn't show up on a 1099 form.

Also, credit card interest is typically far higher than the underpayment rate, so using money to keep your CC balance lower over 9-12 months would make sense.

Point is, it is all relative to other uses of money as to whether making full estimated payments is wise or not. Assuming of course that one is disciplined enough to actually pay the full amount when it is due.

The biggest problem in my mind is that it is called a "penalty" (technically, addition to tax) when in fact it is just an interest charge like any other loan, not a penalty. Taxpayers are likely to falsely hold their preparer at least partially responsible (whether they say so or not) for them owing a penalty when they do not owe a penalty.

[Snaggletooth]

Good response RR. You are correct about the term "penalty" - it is for the use of money, and effectively is interest ... disguised as a penalty. The reasoning? I dunno, but there are situations where interest would be deductible but penalties are not.

[Lion]

Had a contractor who watched his cash flow, so usually did NOT make ES. He had a good feel for how much he was making, so he would start tucking cash away in his MM or even a 3-mo CD each winter to be able to pay when he filed his tax return. We discussed ES payments. But he was comfortable paying the IRS interest, which was less than he'd pay putting supplies on his biz credit card.