Do I have to pay taxes all year?March 21, 2012: 6:00 AM ET
Can I keep my tax withholdings throughout the year and earn interest off of the money, then pay my taxes at the end of the year? This way I would earn interest off the money, rather than the government. — Gabe Scherer, St. Louis, MO
Sure you can -- as long as you don't mind paying interest and penalties to the IRS in April due to underpayment of taxes. "If you want to boost your withholdings and claim 30 exemptions and get your whole paycheck back, you can do that," says Howard Samuels, a CPA in New York City. "But when you do your tax return you're going to be in a world of trouble."
That's because while you don't want to let the government hold onto your money all year long (in the form of an April refund to you), the government isn't in the money lending game, either. Tax rules require a certain pay-as-you-go tax behavior, and if you don't meet minimum tax requirements, you could owe some fees in the end. Ask any self-employed person who's required to make estimated tax payments every quarter.
Take solace, though: You're not losing serious cash. "With current rates on CDs averaging just over one percent, you really aren't missing out on much," says Lynne Strynchuk, a financial planner in Melbourne, Fla. "And given that you would need to have that money within one year, it would be a mistake to invest it in a riskier security." There's also the fact that after you adjusted your withholding, you'd have to set that money aside and never touch it. Maybe you're a paragon of self control, but many people aren't, and that seems like a risky game to play.
-- Kate Ashford
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