Pay taxes quarterly rather than monthly
If you are self-employed or retired and getting a pension check, did you know you don’t have to have taxes taken out of your checks each and every month? The interest that this tax money could earn could be about $100 or $200 a year, which invested yearly over forty years at 8 percent could net between $25,906 and $51,811.
If you can, pay your taxes by using an estimated tax payment schedule, which means that four times a year (April 15, June 15, September 15, January 15) you need to send in an installment payment of the taxes that you will owe. Here, too, you have a choice. In these four installments you need to send either 100 percent of what last year’s tax liability was, or 90 percent of what this year’s is projected to be. If your adjusted gross income (AGI) last year was more than $150,000, the IRS will make you pay 110 percent of last year’s tax liability, or 90 percent of what this year’s will be. (States all have their own rules for estimated taxes, so it would be wise to check.) You would naturally choose to send in whichever was less.
Let’s say last year you owed $8,000 in taxes, but this year you took a large sum of money from your retirement plan and, as a result, you will owe about $18,000 in taxes. Your choice is to send in 100 percent of last year’s taxes, which totaled $8,000, over those four installments at $2,000 each, or pay 90 percent of what you expect this year’s tax liability to be—in this case 90 percent of $18,000 $16,200.
Who wants to part with money, particularly to the IRS, before they have to? You would pay the $8,000 on time, in four installments of $2,000 each, and keep the remaining $8,200 you owe in a money-market or interest-bearing account of some kind. Instead of letting the IRS earn interest on your money, you’re doing it. And it can add up to a nice sum.