What's too much and what's not enough?

Most people are happy to hear that they are receiving a refund on their tax returns. But when is a refund too much?

If you had unexpected expenses or had less income than you anticipated, you may receive a refund larger than expected. But if year after year, you are receiving what you would consider a "significant" refund, that's too much. By having excess income tax withheld from your paycheck or making excessive estimated payments, you are, in effect, making an interest free loan to Uncle Sam.

Some people do this intentionally. It's their method of putting money away on a regular basis. If that's your reason, ask your employer or bank if it is possible to set up periodic withdrawals from your paycheck or checking account to be transferred to a savings account or Christmas Club type account. The money will be earning interest (however minimal lately!) and will be accessible to you in case of emergency.

Speak to your Personnel Department or tax preparer and ask about increasing the number of your allowances or decreasing the amount of your estimated payments.

Conversely, when are your tax payments not enough?

If you had an unexpected windfall or your expenses were not what you anticipated, you may end up owing on your tax return. And if the amount of payments that you have made through December 31 are below a certain threshold, you may end up also owing interest and penalty. Again, if this happens infrequently, it's not a big problem. But if year after year, you are accruing interest and penalty, you need to take action. Speak to your Personnel Department or tax preparer and ask about decreasing your allowances or having an additional amount withheld or having the amount of your estimated payments increased.

If your current year payments reach the safe haven threshold compared to your prior year tax liability (that is how much tax was due in total over the course of the year, NOT how much was due with your return), in most cases, you will not incur any penalty or interest on your tax due. Safe haven thresholds vary with your level of income so consult your tax preparer for specific information.

Remember that income taxes are on a pay-as-you-go system. If you won the lottery in January, you can't wait until December to pay taxes on your winnings. If you do, you could owe interest and penalty on that income.

The rules for paying estimated taxes are different for farmers and fishermen than for most businesses so be sure to take those into account.

 What could you do what the extra money that you are loaning to Uncle Sam or that you are paying in interest and penalty?