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Instead of having taxes withheld at every pay period then filling a tax return the following year to determine further liability or refund status, I'm wondering if it's possible to defer pay period withholdings to say year end. One intent of this would be to maximize potential investment income on the extra gross income, like a no interest/penalty loan of sorts from the IRS.

  • It can't be literally year end; withholding only counts if it comes out of pay actually or constructively paid to you during the year. It would have to be paydays near year end like Nov and Dec. Remember the employer is allowed 30 days before applying a W-4 change, and must reject it if you 'indicate in any way it is false'. You can also be penalized, and in theory prosecuted, for falsifying W-4 to reduce withholding, but if you do make it up in time I doubt they would bother. – dave_thompson_085 Jun 14 '17 at 10:04
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No. The IRS will assess an "Underpayment Penalty" if you have not been paying as you go through the year. You would have to have a reasonable amount withheld at least quarterly to avoid the penalty.

Generally you will owe the underpayment penalty if you owe more than $1,000 at year end, or have had less than 90% of your actual tax due withheld through the year.

  • Does this mean that deferring weekly/semi-monthly/monthly taxes for quarterly payments would be roughly equivalent? Thanks for the great information! – Garren Jun 13 '17 at 17:36
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    @Garren, Yes, and if you're self employed that's how you would likely manage your tax estimates and payments. However, as an employee it's not likely the payroll department of your employer would be open to this sort of flexibility. – quid Jun 13 '17 at 17:39
  • I'm not sure but you might be able to set your W-4 to '10 deductions' (so you pay no tax), and then make a (appropriately calculated) catch-up payment in Mid December (before end of year), so you should be good. However if you miss that, or miscalculate, you'd be in trouble – Aganju Jun 13 '17 at 21:22
  • "You would have to have a reasonable amount withheld at least quarterly to avoid the penalty." Even if you withhold more in the last months so that your total withholding is at least 100% of last year's tax? – user102008 Jun 11 '18 at 5:52
  • This is wrong for withholding; unless you elect to use actual withholding dates on 2210, withholding is treated as paid equally for the four almost-quarters and thus timely, regardless of when actually paid; see the form 2210 line 19 instructions. @Aganju: that's why an increased payment in Dec. is not sufficient, but increased withholding in Dec. is -- if you can arrange it. If you achieved the earlier underwithholding by falsifying W-4, there is a separate $500 penalty for that, but only if they go to the effort (cost) of investigating you, which they probably won't. – dave_thompson_085 Sep 20 at 6:21
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As Quid discusses, the IRS is not in the business of giving free loans. The government needs the money throughout the year, and it needs to collect it evenly throughout the year.

As a practical concern, 55% of Americans have no savings and live hand to mouth. If those people deferred their taxes to an April 15 balloon payment, realistically they would be unlikely to manage their savings to meet it. April would come and they just wouldn't have it! This would create a very expensive enforcement and collection problem for the IRS. And a cash flow problem for the citizen now accustomed to tax free income, because his paycheck now shrinks by double or triple the normal withholding - garnished for his past taxes, penalties and interest, and of course the normal withholding for this year. And his lawyer bill.

There is a big exception. If the underpaid tax was caused by income that occurred at the end of the year, then the IRS gives you a wave. They don't expect you to pay estimated tax evenly if the income wasn't even. I did exactly that when I converted an IRA to a Roth in an gap year. The small income of that year accrued no tax; the conversion ran the tax bull up to about $5000 but it happened in November. I paid on April 15 and never heard another thing about it.

  • Actually there are two (maybe three) exceptions: if your taxable income varies during the year (your one-shot, or seasonal business/job) you can make estimated payments for each 'quarter' (IRS quarters are slightly off from normal people), but you have to fill out form 2210 schedule AI (Annualized Income) to demonstrate it and that's a notable hassle; or if your taxable income and thus tax is higher this year than last, but your withholding-plus-estimated is enough to pay last year's tax (plus 10% for people over $150k AGI) there is no penalty for this year (without filing 2210). ... – dave_thompson_085 Jun 14 '17 at 9:47
  • ... You probably got/used the latter. If you owed no tax last year, then there is never a penalty for this year; the instructions describe this as a separate case, although logically it is subsumed in the paid-enough-for-last-year case because if the amount you needed to pay is zero then any payment amount even zero is greater than or equal to zero. – dave_thompson_085 Jun 14 '17 at 9:50

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