Tuesday, February 26, 2013

Settling Up

Every year that my wife and I have filed US income taxes jointly, we've either owed money at the end of the year or else we've received a tiny/insignificant refund.  This  year is no exception.  Some people might be disappointed about this, preferring to get a nice refund each spring.  I'd actually like to go to the other extreme and have no taxes withheld at all during the year, and have a huge bill each spring.  That way I'd have complete control over the money until it came due.

Back when we had a mortgage, I asked our lender to stop holding property taxes in escrow for the same reason.  Since then, we've paid the property tax bill out of our own pocket whenever it was owed.  This was good practice for post-mortgage living because there's no option for escrow when the mortgage is gone.

In our case, the property tax bill is quite a bit smaller than the income tax bill, but the same level of discipline is required to plan and save for each tax expense.  Unfortunately most people don't seem to have the necessary skills to withhold taxes on their own, because the US government (and most state governments) requires everyone to have a portion of each paycheck set aside for the end-of year reckoning.  I suppose this makes perfect sense from the government's point of view.  By withholding more than is needed and requiring people to file a return to get back any excess, the government has a much better chance of collecting the taxes it is owed.

Still, it would be nice to have the option to petition the government to stop year-round withholding (on a case-by-case basis) and settle up in a single transaction every April.  I'd certainly apply for this if it was offered.

In the current low-interest-rate scenario, there isn't too much lost by sending prepayments on taxes to the government, but if rates were to rise to the levels we saw 15-25 years ago, it would be plausible to lose an opportunity to earn some decent interest from self-escrowed taxes.

6 comments:

  1. I wish this was an option. That sure would help, although I totally agree that this would just cause problems because the government wouldn't be able to collect from probably somewhere close to 90% of taxpayers. Even if the money was set aside in an escrow account earning whatever piddly interest rate is offered right now, you'd still come out ahead.

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    1. I think we would have gotten around $2 in interest for saving our tax obligations in an escrow account in 2012, but 2 > 0.

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  2. Yeah, I'm with you in preferring to pay on big check to Uncle Sam at year-end rather than throughout the year. And the big jerk even penalizes those of us who don't pay enough along the way, regardless of whether we pay by the "deadline" or not! I'll probably have to start paying estimated taxes on dividend income within the next few years...ouch.

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    1. We made that mistake one year. I didn't realize that a penalty was involved if the total withholding throughout the year was significantly lower than the tax owed. I don't mind paying the tax that's due, but paying the penalty irritated me, especially when I was able to make things whole at tax filing time. So now we send estimated payments each quarter to avoid a recurrence of that. Definitely a more complicated process than it needs to be...

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  3. I pay my property taxes myself as well. It isn't that hard and escrow accounts seem incredibly annoying and complicated. What I do is I estimate the next year's property taxes to increase from this year's by 3% and set 1/12th of that aside each month. When the yearly bill is posted, I set up bill pay for each of the two installments and I'm done for the year. So in some sense I've already "paid" my property taxes for 2013, but the money is still accumulating in my checking account and *I* get to earn the interest on it.

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    1. Too bad there isn't much interest to earn these days. Earlier today I happened to be looking at some old statements from one of our accounts around the 2005-2006 timeframe and was shocked to note that money market mutual funds were paying 4.5% interest at that time. I certainly wouldn't mind seeing rates rise again to help reward savers.

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