Paying uncle Sam over $3K and his damn $30 "underpayment penalty" as well. I'm quite content with that. I can always budget money out, but predicting a "refund" is futile and stupid. I've known too many people who base their entire summers around a refund. It's just idiotic.
I think you meant to say “lowered your withholding”, i.e. had less taken out, or in other words “upped your withholding allowances”. (Sorry as a payroll professional, I just had to correct you – it is a common mistake ; ), )
Be aware however that while owing $3K and paying only a $30 penalty doesn’t seem so bad, you “could” face a $500 civil penalty from the IRS for “purposely falsifying” your W-4 in order to claim more allowances than you were not entitled to claim and while you only paid a $30 penalty at the time you filed, the IRS could come back and charge you interest based on the idea that the U.S. system of taxation is based on a “pay as you go” principle. :(
This would be especially true if for any reason you were not able to pay the $3K by April 15th (not to mention the additional penalties + interest) and even a $1,000 fine and up to a year in jail for intentional and repeated underwithholding.
IRS Penalties for Underwithholding
That and the IRS could also issue a “Lock In” (2800C) letter to your employer if your yearend tax bill is big enough and you owe more than $1K repeatedly, instructing them to withhold only x number of allowances and not allowing you to change your W-4 without a Lock In Release letter to your employer from the IRS. I had that happen recently to an employee who was claiming married and 15 withholding allowances but after the IRS “Lock In” letter I had to change it to single and 0 allowances and despite this employee’s objections and protestations, legally I have no choice and it has to stay that way until I receive a letter from the IRS either changing it or releasing the Lock In all together.
Understanding your 2800C Letter
But I completely agree; purposely planning on and getting a big refund every year is a truly stupid, monumentally stupid idea – it is nothing more than an interest free loan from you to the government. You are much better off having less withheld and instead of spending it each pay, putting it in at minimum, an interest baring savings account or just stuffing it a coffee can for a rainy day or better yet, putting the extra toward paying down any debt.
What you really want to do is neither owe at tax time nor get a refund and get as close as possible to that zero number. Sometimes that means adjusting your W-4 allowances up or down or even having a bit extra taken out for a time, several times during the year or at least once a quarter if necessary given any changes in your tax situation (additional income or a 2nd job, deductible losses, the sale or purchase of a home, marriage, divorce, having children, children no longer your dependents, etc.) in order to get as close to possible to zero liability and zero refund as possible.
There are several tools available for calculating your withholding, among them:
Top 5 Reasons to Adjust Your W-4 Withholding
And if you file your taxes yourself using H&R Block Tax Cut or Turbo Tax, they also have calculators as does “Paycheckcity.com” as do many of the major payroll processing services like ADP and Ceridian if your employer uses one of them and you have access to their “Self Service” site.
So next year, please don’t owe anything more than $1K and preferably much, much less and don’t give the IRS an extra dime in the form of any penalty and don’t get a refund either or at least not much more than the cost of a can of coffee (where you just might be stashing that extra cash ; ), )
How do I do that with monies withdrawn from my IRA?