Written By: Marissa Waldron

Or are you expecting to OWE money to the IRS when you file your taxes?  If so, read on!

Here in the US, we have a “Pay as You Earn” (PAYE) tax system. You might’ve heard the IRS slogan, ‘Pay as you go, so you won’t owe!’ This means that we are supposed to have an appropriate percentage withheld from our income sources OR make quarterly payments, so that when we go to file taxes, we don’t owe a large amount. If we do owe a large amount, defined as greater than $1,000, the IRS charges interest on that money called “an underpayment penalty.”  For individuals, the interest rate is equal to the federal short-term rate + 3 percentage points. If you’ve been following interest rates over the last few years, it should be no surprise that in just two years, the interest penalty has gone from 3% to the current rate of 8%! Ouch.

Many of our clients who are retired, self-employed, contract workers, or transitioning into retirement, need to determine what their withholdings or tax payments should be. With the penalty being so low in recent years, some savvy people may have opted to take the penalty in order to leave their money growing for longer (not on the recommendation of their advisor). With interest rates now jumping up, that strategy is not likely to pay off.

So, what can you do? Maybe you’ve experienced significant changes this year due to fluctuating income, unexpected gains from investments, Roth conversions, or not updating withholdings. Don’t fret yet: if you’ve paid at least 100% of last year’s taxes or 90% of this year’s taxes, you will not owe a penalty.

If you still think you will be penalized, there is another strategy that could work: Withhold a higher amount of federal taxes on an IRA distribution. Under federal income tax laws, taxes withheld from an IRA distribution at any point in the year are treated as if they were paid evenly throughout the year.  One last option to mention is for those taking RMDs and charitably inclined: you may make a Qualified Charitable Distribution (QCD) to satisfy your RMD for the year and the amount of the QCD will not be taxable income (less income = less taxes).

If you answered ‘no’ to any of these questions – we’d be glad to help you become more prepared. 

Say What?

Some millennial parents say they feel “abandoned” by their baby boomer parents who have chosen to travel rather than pitch in to help raise their grandkids. One millennial mom says she has to “schedule visits with her parents or in-laws months ahead of time.”

But one boomer grandpa had this to say of his daughter’s generation, “They’ve all got nannies. We didn’t have a damn nanny. They drive expensive SUVs. I drove a fricking minivan.”

(Writer’s note: Once again, Gen X is off minding their own business, not stirring up any trouble.)

Dad Joke Of the Week:

Question: What New Year’s Resolution should a basketball player never make?

Answer:  To travel more.

This week in history:

1843 (Dec. 19) – A Christmas Carol by Charles Dickens was published in London.

1891 –The first game of basketball was played when James Naismith decided to test the new game he invented.

1903 (120 years ago) – Orville and Wilbur Wright made the first successful flight in history near Kitty Hawk, North Carolina.

1957 – 22-year-old Elvis Presley received his official draft notice for the U.S. Army while spending Christmas at Graceland, his newly purchased Tennessee mansion. He attained the rank of sergeant during his service.

1973 (50 years ago) – “The Sting” starring Paul Newman and Robert Redford opened in theaters.

1973 (50 years ago) – Iconic horror film “The Exorcist” opened in theaters.

Have any questions? That’s what we’re here for! Call us at 844-227-5766 today!