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Are Federal Tax Underpayment Penalties a Big Deal?
Posted on 4/9/24 at 10:11 am
Posted on 4/9/24 at 10:11 am
I received a pay bump several years ago, and I never updated my withholdings. This resulted in underpayment penalties of anywhere from $300-500. This year, it was about $450, and I owe $10K in taxes (including penalty).
So here's my question...if I have that $10K sitting in mutual funds all year earning interest of 6% (conservative estimate) or more, which is $600, is there any reason I should change my withholdings? It seems that in most years, I'll out earn my underpayment penalty in interest from investing what I would have withheld. Am I missing something here?
So here's my question...if I have that $10K sitting in mutual funds all year earning interest of 6% (conservative estimate) or more, which is $600, is there any reason I should change my withholdings? It seems that in most years, I'll out earn my underpayment penalty in interest from investing what I would have withheld. Am I missing something here?
This post was edited on 4/9/24 at 10:12 am
5
Posted on 4/9/24 at 10:21 am to SUB
The $10k accumulates over the year, so you aren't earning 6% on the full $10k day 1.
Posted on 4/9/24 at 10:32 am to SUB
The difference is marginal. You’re talking a couple hundred bucks. I’d just update withholdings and be done with it.
Posted on 4/9/24 at 11:41 am to CecilShortsHisPants
quote:
I’d just update withholdings and be done with it.
this
Posted on 4/9/24 at 11:43 am to SUB
The value of them not digging into your returns any further than they already do is worth the extra $200 you lose by not investing it
Posted on 4/9/24 at 12:15 pm to SUB
Its not a big deal, no. I mean its not like if you underpay every year they will eventually arrest you. You are penalized and that's that, as far as I know...
But as said, why?
But as said, why?
Posted on 4/9/24 at 12:20 pm to VolSquatch
Thanks fellas for the feedback. I forgot that the tax burden of $10K accumulates over time and VolSquatch's point is a good one. I'm going to increase withholdings to avoid future penalties.
Posted on 4/9/24 at 12:20 pm to SUB
My interest and other income, with no withholdings, went up considerably this past year. Had to pay about $3K fed. Same situation will likely repeat this year.
To avoid the risk of penalties, I considered doing quarterly payments, but instead just jacked up my withholdings from my paycheck to cover the extra tax so I don't have to remember to make the quarterly payments throughout the year.
To avoid the risk of penalties, I considered doing quarterly payments, but instead just jacked up my withholdings from my paycheck to cover the extra tax so I don't have to remember to make the quarterly payments throughout the year.
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