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Financial Planning Tip March 2024

March 2024

We're about one month into tax filing season, and many tax professionals report an unusually high number of clients are seeing a dreaded "Balance Due" at the end of their returns. We'll tell you how to avoid this, and why you should embrace it instead.

If you receive a regular paycheck and a W-2, now is the time to act if you want to avoid a balance due for 2024. Gather your completed 2023 tax return and a recent pay stub for yourself and your spouse, if applicable, and head to the IRS Withholding Calculator. Be prepared for 10-15 minutes of questions & answers, but nearly all the information you need should be on your pay stub and tax return. Pay attention to investment income. Tax pros have said this is the biggest change for clients who have a balance due, likely because higher interest rates have provided a big boost to interest income. The more precise you are with the data you enter into the withholding calculator, the closer you'll get to having no balance due and no refund on tax day 2025. If you'd like to be sure you get a refund or if you'd like a little extra cushion, there's a line for that -- 4c -- on the W-4 that will automatically be generated when you complete the withholding calculator.

If you don't receive a regular paycheck -- you're self employed or retired, for example -- you will make quarterly estimated tax payments. The withholding calculator above is still a good place to start if your tax preparer hasn't provided you with estimates already. You'll need to fudge the numbers a bit to get them to fit in the withholding calculator's framework, since the calculator asks for monthly wages and withholdings, which may not reflect the reality of a self-employed worker's finances. The remaining parts of the simulation though, are invaluable, including the opportunity to simulate investment income, itemized v/s standard deductions, tax credits, and so forth. At the end of the estimator, you'll receive an estimate of your 2024 tax obligation. Divide by 4, and pay that for each of your quarterly installments. Don't forget about tax withheld from an IRA distribution, and consider using any IRA distributions as an easy way to address all your estimated payments at once.

Why do we say you should embrace a balance due? As long as you aren't paying penalties, that means you got an interest-free loan from the government for the past year. Think about the flip side. If you received a $12,000 refund, you might be elated...until you consider how an extra $1,000 per month could have been spent (or saved!) throughout the year. Having a balance due means you've done that in reverse. The government is losing out on $1,000 per month. Of course, the government has penalties in place to prevent you from underpaying your taxes too much. You're required to pay at least 100% of your prior year's total tax in estimates each year, or 110% if your income is over $150,000.

Check with your tax preparer if you'd like an extra set of eyes, and above all, check your withholding a few times throughout the year to be sure you're on track to have at least 100% or 110% of your 2023 tax withheld. You may be able to send in less withholding safely, but be careful doing so in order to avoid penalties.


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