The IRS announced a drop of one percentage point in the interest rate it charges on underpayments—the rate applies from January 1, 2009, through March 31, 2009. The rate for this period is 5%. This is the same rate that the IRS pays on noncorporate overpayments during this period (different rates apply to corporations).
This rate may have an impact on final estimated tax payments for 2008 (due January 15, 2009, for individuals). The cost of falling short on tax payments for this year is less costly as the IRS interest rate declines. Freelancers and business owners who make personal estimated tax payments should probably err on the side of underpaying rather than overpaying taxes at this time, especially when money is tight.
When figuring your final payment for 2008 consider these points:
- There is no penalty on underpayments not exceeding $1,000 (you have a $1,000 cushion. Even if your underpayment is greater, you may fall back on a safe harbor to avoid an underpayment penalty.
- If you overpay, you will have made an interest-free loan to Uncle Sam. You can’t recoup the overpayment until you file your 2008 return. If the IRS repays you promptly (within 45 days of filing your return in most cases), you won’t earn any interest.