Tax season is upon us, a time of year that can create fear and loathing among many.  I’m fortunate to say that’s not the case for me.  I’ve prepared my own returns since I was in my early 20’s and, with the aid of software like TurboTax, can usually finish both federal and state returns in a few hours.  This admittedly reminds me of the old cliché “the man who represents himself has a fool for a client,” but I like seeing how the sausage is made.  It makes me more aware of current tax law and can better inform my client conversations about taxes.   

What does upset me, however, is the misleading way that most tax preparation services market themselves. Nearly every one of them brags about “maximizing your refund.”  

• TurboTax: “Maximum Refund Guaranteed!”
• TaxAct: “Tax Tools to Get a Bigger/Maximum Refund!  Maximize Your Refund for Less!”
• H&R Block: “Maximum Refund Guaranteed!”
• Jackson Hewitt: “We Guarantee Your Maximum Refund!”
• ezTaxReturn: “Biggest Guaranteed Refund!”

Don’t misunderstand me; there’s certainly nothing wrong with taking every legal step and deduction to reduce your tax liability.  Tax avoidance (not to be confused with tax evasion) is a national pastime!  But limiting your liability and efficiently preparing your return is apparently not sexy enough; it all must be couched in terms of getting the most money back.  If that’s the way your tax payments are managed, you’re not winning, you’re simply winning the loser’s game.  If you have a large refund every year, the only thing you’ve succeeded in doing is giving Uncle Sam an interest free loan.  Yes, the inverse does expose you to possible underpayment penalties, but that risk can be mitigated to keep your money a bit longer. 

To be fair, managing your estimated tax payments is no easy chore.  If you’re an employee, your employer simply withholds taxes from every paycheck and sends the money to the IRS.  In contrast, if you’re self-employed or retired, the burden to calculate and remit estimated taxes falls squarely on you (and/or your tax preparer), and most will be required to remit quarterly estimates.  The safest option to avoid an underpayment penalty is to pay 100% of your previous year’s taxes. If your previous year’s adjusted gross income is more than $150K, you’ll have to pay 110% of your previous year’s taxes.  The other “safe harbor” option to is pay 90% of your current year tax liability, but that can be difficult to calculate in years with volatile taxable income.  These rules are complicated and the guidance here is necessarily limited and general, so consult with your tax advisor for clarification.

Whether you’re a do-it-yourselfer come tax time or pay to have someone else prepare them for you, take the time properly estimate your tax liability for the next year.  Here’s one quick (but needlessly obscured) tip that has worked for me.  TurboTax has a ”what if” function that allows you to estimate taxes for next year.  Click on “Forms” in the upper left of the top menu, then “Open Form” and search for “What-if Worksheet.”  

Rant over; you may now return to your own private tax hell.