Last week we discussed the urgency of financial planning for 2024, and how it must start long before year-end 2023. Once the clock strikes midnight on December 31, it is too late to correct many oversights and/or errors. When dealing with tax-related items, some can be costly to taxpayers, while others manifest mostly as Opportunity Costs. Both deserve attention.
Opportunity Cost (OC) is likely the most self-explanatory technical term in the study of Economics. I like to think of it as woulda, coulda, shoulda, things we did not do (or did too early or too late). One of today’s largest OC examples is the failure of savers to take advantage of current high-interest rates on savings. Banks and Credit Unions do not normally pay more than a pittance of interest on funds held in checking and ordinary passbook savings accounts. Last week we discussed how to get better rates in our own accounts.
This week, we turn to taxes, a topic many people prefer to ignore. Ironically, ignoring your tax situation can lead to two types of losses: overpaying, and creating Opportunity Costs. There is no excuse for overpaying taxes, despite understandable IRS-induced paranoia in the public. Although itemizing tax deductions is becoming less common, those who do itemize frequently “save something for the IRS to find.” Why not just flush a couple of Benjamins down the toilet? You’d get the same result.
Opposite of overpaying is a combination of underpaying and/or paying late. These items will result in a bill for the tax due, a penalty for being late, and an interest charge on the entire amount. Worse yet is the penalty for intentionally underpaying, which can result in steep fines and interest charges, even if the IRS eventually owes you a refund.
Taxpayers with other than W-2 income may be legally subject to Quarterly Tax Deposits (Form 1040-ES), made in lieu of employer withholding deposits. Taxpayers with sporadic income must be diligent in making their quarterly deposits reflective of income spikes throughout the year. Failure to match income with tax payment timing can result in additional penalties and interest.
Many Americans fail to realize that all income tax owed for a calendar year is due and payable no later than the next year’s filing date, generally April 15. This is true for everyone, including those who file for an automatic filing extension to October 15. If your tax situation is at all complex, hire qualified help in the form of a CPA or other professional preparer (we are not qualified preparers, but we do assist with tax planning for clients).
Next week we will continue our year-end planning series, addressing further topics and opportunities.
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