Should I increase tax payments or keep the money on the side?


Q. When I file taxes, I always owe. I know I can have more taken out of my paychecks, but I save some money each paycheck and keep it on the side to pay the taxes. I like having that balance grow in case of emergencies. We had a debate about this over Thanksgiving. Is there any reason why I should just have more taken from my checks?
— Hoarder, maybe

A. We’re a big fan of emergency funds, but if the money is really earmarked for an expected tax bill, it’s not really an emergency fund.

Plus, you want to make sure your anticipated tax liability should be paid in a timely manner.

You don’t want to incur an underpayment penalty for underpaying taxes throughout the year, said Gail Rosen, a Martinsville-based certified public accountant.

“To avoid a penalty, the federal tax law states that you need to owe less than $1,000 with your return or pay in the lower of 90% of what you owe each year or 100%/110% of your prior year’s tax, depending on your income,” she said.

New Jersey will charge you interest if the balance due with your return is more than $400, and your tax payments do not equal at least 80% of your 2021 tax liability or 100% of your 2020 New Jersey tax, she said.

So yes, try to build an emergency fund, but don’t do it with money you will eventually have to pay to the taxing authorities.

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This story was originally published on Dec. 6, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.