Federal Imcome Taxes are coming due. You need to file by April 15, 2006 your statement of imcome for 2005. Your employer insists that you claim a specific number of dependents at the beginning of the year and then deducts federal income tax from every paycheck. If you are lucky, the deductions taken from your check will total your calculated annual tax obligation and you with neither owe any money or be due any money at the end of the year. Yeah, right!
Trying to estimate a tax obligation a full year in advance is the "impossible guess"! How could you possibly know what is going to happen during the year. Maybe you will have high medical expenses or alternative minimum tax will kick in or you will lose your job or your property tax bill will sky-rocket. Uncertainty, uncertainty, more uncertainty.
From a pure financial standpoint, owing federal tax at the end of the year is the best scenerio. That means you get to hang on to your money longer and keep it working for you until you have to settle with the IRS. I think the rule is that you must prepay 90% of the current year obligation to avoid any penalty. Most people do not like to owe year end taxes because there is a negative stigma that goes with having to write a check to settle up.
From an emotional standpoint, most people pay too much federal income tax from their paychecks hoping that they will get a refund at the end of the year and then they can buy that TV, camera lens, or take a trip. Receiving the windfall is positive and buoys the spirit. It is a lousy financial management to receive a large refund but receiving hunks of cash are euphoric.
In truth, a couple hundred bucks one way or the other for year end tax obligation is not a big deal. If you receive refunds of several thousand dollars, you are not managing your money well.
Here is my message for the day! Don't pay to receive a refund early. Many people find out they are getting a "windfall" refund and then if they pay the tax preparer a fee, they can get money immediately (after the tax preparer subtracts his/her fee). Usually those fees are exorbitant. It is not uncommon to get charged $30-40 for the ability to get $300 cash refund immediately. That is 10% of the total and probably calculates to be 100-300% annual interest charge. That is ridiculous. Most refunds take 3-4 weeks. You waited 12 months (a full tax year) and then several months to file your federal taxes, why do you need an immediate refund. I call the immediate refund "extortion money". If your refund is needed imediately, you probably have bigger money problems.
Do not pay the fee for the privledge of getting you federal tax refund immediately. In most cases it is some high powered loan company ripping you off.
Love,
Dad
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