The government provides public goods and services for the community. And although paying taxes is not a welcoming thought to most taxpayers, it is the government’s main source of fund to support their projects and perform their functions. However, the complexities of taxes can lead taxpayers to either underpay or overpay taxes.
Overpayment of Taxes and Refunds
Overpayment of taxes occurs when you pay more taxes than what you owe the government. When this happens, the government will issue a refund for the excess tax payment. You also have the option to have the overpayment applied to your next year’s taxes.
When Can I Expect My Refund?
The IRS normally finish processing tax refunds in less than 21 days after you submit your tax return. But be careful in relying on tax refunds for your big-ticket purchases or liabilities because it may take longer than 21 days to receive the refund in some situations. It can take up to 4 weeks or more in cases when you filed a paper return, there were errors in the return, or it requires further review.
For state tax refunds, processing time varies by state.
Underpayment of Taxes and Penalties
Conversely, underpayment of taxes occurs when you pay less taxes than what you owe the government. When this happens, you risk yourself paying tax penalties and interests and of course, you still end up having a tax liability at the end of the tax season.
If you are required to make quarterly estimated tax payments, be sure to pay taxes when due or you’ll further incur finance charges with the underpayment of estimated tax penalty.
Is it better to overpay or underpay taxes?
Generally speaking, it is better to overpay than underpay taxes. Other than having a tax refund to look forward to, nothing beats the feeling of not having to owe taxes at the end of the tax season.
Imagine having a tax liability and not having enough savings to pay off your taxes? You will eventually end up paying more than what you actually owe because of the additional penalties and interest charges. So, we can say that underpayment of taxes is similar to overpayment of taxes but without the refunds.
We are not saying that you overdo your tax payments. Overpaying your taxes is like lending your funds to the government interest-free. Such funds can be used for other purposes especially for income generating activities. But if you have the extra money, earning zero interest income is definitely better than paying penalties up to 25% of your owed taxes if left unpaid.
Proper Tax Planning
Achieving the right balance for your taxes comes with proper tax planning and strategy. It may be necessary to adjust your tax withholdings or recalculate estimated tax payments if you have exceedingly overpaid or underpaid your taxes last year. Remember to take into consideration expected changes in your life events such as getting married, expecting a baby, or buying or selling your home. You may also want to consult our tax expert to give you the best advice for your tax needs.
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