In mid November, the IRS announced that interest rates will decrease by a percentage point for the calendar quarter beginning January 1, 2025. 

Background on Rate Changes

The IRS adjusts these rates quarterly and they usually trail any market interest rate changes such as the prime rate. The last time the IRS decreased interest rates was during the third quarter of 2020 when the interest rate was decreased to 3%.     

The New Rates for 2025

Below are the new rates for individuals and corporations:

  • Overpayments
    • For individual tax overpayments, the rate will be 7%, compounded daily
    • For corporate overpayments, the rate will be 6% up to $10,000 and then 4.5% for the portion exceeding $10,000
  • Underpayments 
    • 7% for individuals 
    • 9% for large corporate underpayments

What Does This Mean for You?

For high net-worth individuals and corporations, these new rates present an opportunity to revisit the importance of proactive tax planning strategies and strategic cash flow management.

Higher-Yielding Opportunities. Since overpayment rates will decrease, the benefit of leaving excess funds with the IRS diminishes. 

  • Consider this: By adjusting your estimated tax payments for the current year (based on current year income projections rather than prior year tax liability), you can avoid overpaying and instead use those funds to invest in higher-yielding opportunities.

Tax Planning Strategies. If a tax underpayment is possible, the new lower interest rates are still significant.

  • Consider this: Work with your tax advisor to ensure your estimated tax payments are structured in a way that will avoid estimated tax underpayment penalties tied to the IRS interest rate. See a few “rules of thumb” below.

To avoid an underpayment penalty, estimated tax payments should be based on the greater of these two items:

  • Your prior year’s tax liability (100% or 110% of the prior year’s tax liability depending on your adjusted gross income); OR
  • 90% of your current year’s income tax liability 

When anticipating higher taxable income, current year estimated tax payments are generally calculated using the prior year’s tax liability amount. 

When anticipating lower taxable income, current year estimated tax payments are generally calculated using 90% of the current year’s income tax liability.  

Debt Comparison. Keeping cash on hand is understandably important. Paying off any underpayment balance might prove more cost-effective than carrying IRS debt into 2025.

  • Consider this: Before simply underpaying the IRS, compare the current underpayment interest rate with other personal or business loan rates.

Businesses with outstanding ERC claims. For businesses that have yet to receive their ERC refunds, interest will continue to accrue on the outstanding refund amount at a very attractive market rate — even with this 1% decrease.    

Learn More

Take action now to align your financial planning strategies with the changing economic landscape of 2025.

To learn more about optimizing tax payments, leveraging better investment opportunities, and minimizing underpayment risks, contact our tax team today.