Your clients may also inadvertently overestimate and pay too much quarterly taxes for reasons that could include a drop in income or a year of high deductions in medical costs that lower overall tax liability. The government pays no interest on overpayments and the resulting refunds.
“Some clients want to maximize their balances due, possibly even wanting to see a bit of estimated tax underpayment penalty to be assured that they didn’t pay too much tax too soon,” says Joe Musumeci, CPA with Rowles & Company in Baltimore. “Others swing to the other end of the spectrum and look forward to a refund, possibly even a sizable refund. They understand that such refunds are merely overpayments of tax they made during the year. The biggest mistake we see is a mismatch between the client’s goals and the estimated tax payments they make.”
In addition, Musumeci notes, don’t let your HNW client blindly apply the same payment approach to both federal and state taxes. In a state with high underpayment penalties, he adds, it may be wise to at least start the year making safe harbor estimated state tax payments based on the prior year.”