It’s so easy to get a tax filing extension and put off the unpleasant work til fall.
Procrastination is easy, and even sanctioned by the simplicity of an extension.
But doing it now is important to your financial wellbeing
From a purely selfish point of view, you need to know where you and Uncle Sam stand.
Really it’s all about next year. So, what did Goldilocks know about taxes?
Getting withholding just right
Your withholding for next year’s tax bill needs to be just right, not too large, not too small, but right close to what you’ll owe.
Just like Goldilocks and her porridge.
And a good estimate of what you’ll owe for this year is what you owe for last year, the return we’re preparing this spring.
Unless your finances are wildly variable, last year may not be a surefire template for this year, but it’s usually close.
But you don’t know what you owed for last year til you do the math. (I know, math, but it can’t be helped). And you won’t do the math now if you get a tax filing extension.
Scared to know?
Fear keeps many from figuring out what they owe on their taxes. Fear that it’s a number bigger than they can pay. Fear of drawing attention to themselves.
So, let’s look at the downside of putting it off til October.
For starters, it costs you to be underwithheld. There’s a penalty for not prepaying enough of this years taxes during the year.
If you didn’t withhold enough for last year, you’ve incurred a penalty. And, unless something changes, you’re on your way to a penalty for this year.
Do you taxes now, and you find out, early this year, that you need to increase your withholding to come out just right at the end of the year.
Wait til October to figure out how you did last year and there’s not much of this year left to get fully paid in.
Remember that an extension is just an extension to file the return later, without penalty. It isn’t an extension to pay later, without penalty.
So, facing your fear and doing the return now sets you up to avoid a penalty for being underwithheld for this year’s taxes.
In line for a refund?
If you’ve sent Uncle Sam more money each paycheck than you actually owe, you’re in line for a refund. Nice, but not really.
You’ve just made Uncle Sam an interest free loan. If you’ve paid interest on credit cards while loaning the government money, you got the short end of that stick.
If you have the discipline to do really good things with your tax refund, it’s not so bad. Put it in your IRA and I’ll cheer.
But if it pays down debt you’ve carried all year, or funds an indulgence because it feels like free money, I’m not so impressed.
So, do your taxes for last year, and if you’re getting significant money back, reduce your withholding.
Consider diverting the reduction to a savings account or a retirement fund. You’ve shown you can live without it over the past year.
Live with it, in your hands, for your purposes, for the rest of this year.
It will be just right.
Image courtesy of Violscraper and Flickr.