Credit card interest last time. Paying off a debt today – and saving for retirement. I might do the Globe quote:
If you file your tax return on time or get an extension, but fail to pay, the IRS will charge you interest on unpaid taxes. That rate currently works out to about 3.25 percent and is compounded daily.
The IRS also will charge you a late payment penalty of one-half of 1 percent of any tax not paid by April 17. That translates to a $25 penalty if you owe $5,000. It is charged each month or part of a month the tax goes unpaid, up to 25 percent, or $1,250 on that $5,000.
That interest rate can jump to 1 percent, however, if the tax bill hasn’t been paid within 10 days after the IRS issues a notice of intent to levy. But if you work out a payment plan with the IRS, it will reduce the rate to one-quarter of 1 percent.
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There are three kinds of questions to ask about this quotation.
The narrowest would ask for the cost of that $5000 nonpayment, for, say, six months. That would require careful reading along with an understanding of “daily compounding”.
The second would ask which costs more – the interest or the penalty? A quick estimate shows that the penalty dwarfs the interest, even without worrying about the details.
The third question is “what’s the ten year lesson?” And the answer is easy: pay your taxes when they’re due. No need to do any of the arithmetic at all!
We opted for the third one, in class. Then we talked about mortgages, paying for retirement, and the car deal you can’t believe exercise.
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