Get next year's tax refund now

You can avoid any under-withholding interest or penalties for 2009 if you meet any of the following safe harbors:

• Your net tax due is less than $1,000.

• You've paid in at least 90% of your total tax due for the year.

• Your prior year's adjusted gross income wasn't more than $150,000 and you paid in at least 100% of your prior year's total tax.

• Your 2008 adjusted gross income was more than $150,000, then for 2009, you must pay in at least 110% of what your 2008 income-tax bill was. If, for example, your adjusted gross income exceeded $150,000 in 2008 and your total 2008 tax was $20,000, you can avoid any interest or penalties for 2009 if you pay in at least $22,000 -- 110% of the $20,000.

• The American Recovery and Reinvestment Act of 2009 created another safe harbor for individuals with small businesses. Starting in 2009, if your prior year's adjusted gross income was less than $500,000, and at least 50% of the gross income from that return was from a business that employed no more than 500 people, your safe harbor is now 90% of the tax for the current or preceding year.

No matter how much you may owe in April, if you meet any of these safe-harbor requirements, you escape all under-withholding interest and penalties.

In the worst-case situation, you can take the "extra" dollars and put them in a money market fund each pay period. This cash will be there April 16 if taxes are due, and at least you've earned some incremental dollars in interest.

Unlike estimated tax payments, which are always due on specified dates (April 15, July 15, Oct. 15, and Jan. 15 of the year following), payroll withholdings are expected to be paid evenly throughout the year. Some sophisticated, tax-knowledgeable individuals significantly under-withhold on their income for the first 11 months of the year, file an amended W-4 and then significantly over-withhold in the last month to make up the difference.

As long as you meet any of the safe-harbor rules above, you'll escape interest and penalties for under-withholding.

So take a look at your W-4. I'll bet you'll be glad you did.

Updated July 7, 2009

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