Taxes – Which is Better: Large Refund, or Owe the IRS?

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Today is tax day – I hope you got everything taken care of! Like millions of others, I waited until the last minute. Last year, an estimated 35 million people filed their taxes in the final weekend leading up to tax day, and this year will be similar. Tax preparers and post offices will be…

Today is tax day – I hope you got everything taken care of! Like millions of others, I waited until the last minute. Last year, an estimated 35 million people filed their taxes in the final weekend leading up to tax day, and this year will be similar. Tax preparers and post offices will be open late tonight, some remaining open as late as midnight. (as long as your tax return is postmarked by midnight, you are on-time).

I filed and paid my taxes yesterday

I’ve been holding off on filing my taxes this year because I owed a lot of money – $1,100. Of course, I could have filed at any time as long as I paid by the April 15th deadline, but for some reason I held off on filing as well.

This is the first year I have had to pay the IRS. I normally receive a decent size refund, even though I usually withhold a fair amount of taxes. (to be fair, for several years I was in the US Air Force and was able to claim several months worth of salary as tax exempt because I served in a military combat zone).

Yesterday I drove to the post office after work to send my tax payment to the IRS. The parking lot was full and the line of cars was backed out into the street about 15-20 cars deep. I drove around the side of the building to the drop box. I’m sure my payment will be safe enough.

Predicting Tax Obligations is Difficult to Do

My wife and I owed a lot of money this year because our tax situation changed drastically from 2006. In 2006, I separated from the US Armed Forces and was unemployed for several months while I looked for new work. This lowered my pay dramatically form the previous year. My wife was in the military at the time and had several months tax exempt combat pay which she earned while deployed to a tax free zone. On top of that, we had some residential energy tax credits which saved us quite a bit of money. We had a nice refund last year.

This year, however, our situation changed again. I had a full time job and earned much more than the previous year. I also had a small amount of income I earned from my business. However, my wife changed jobs and took a $20,000 pay cut (quality of life is more important to us than money), and we didn’t have as much tax free pay or any tax deductions from energy credits. The result of all these changes was owing the IRS $1,100.

I’m not sure what we could have done differently to prevent this, as there were several factors we could not control or predict.

How will next year’s taxes turn out?

I don’t like paying the government a lot of money at tax time, but I also don’t want to give them a huge interest free loan every year. Ideally, my tax return would zero out every year, or at least come very close. But unfortunately, that isn’t always possible to predict, and it gets more complicated when you add in other factors.

I am looking for a new job, which may result in a salary adjustment. I have a small business (this blog and some other on-line ventures) that earns me a money which we now have to report. We also earn a money from from interest and dividends (which is difficult to predict). Then we have to factor in charitable contributions, 401(k) contributions, mortgage interest deductions, and other qualified deductions.

To put it simply, it is difficult to predict tax obligations, especially when your situation becomes more complicated. I will file quarterly estimated income taxes for my business, and I will also make some changes to my W-4 to (hopefully) prevent this from happening again. GenXFinance wrote a great guide on how to adjust your W-4 withholding.

Which do you prefer for your annual tax obligation – to pay or to receive?

As I already mentioned, I would prefer for my taxes to zero out every year. But no matter how much effort I put into it, I don’t see that happening because our situation changes throughout the year.

Some people prefer to owe a lot of money to the IRS. They prefer to use the money throughout the year and are not giving the IRS an interest free loan. The only downfall is coming up with the cash in April, which some people have a hard time doing.

Some people prefer to receive a large refund every year. They look at it as a forced savings account. Even though many people know they are giving the government an interest free loan, they don’t mind because they have a hard time saving on their own and look at a large tax return as “bonus money.” I had a good friend who did this every year. At least he knew he didn’t have the discipline to save on his own.

If you can’t make it zero out, at least get it close. A couple hundred bucks in either direction is usually the best bet. you don’t give the IRS too much of the money you could have had working for you, and you don’t end up owing them too much either.

Reader Poll: Which do you prefer – owing the IRS money, or a large refund?

  • I would rather receive a large refund every year (66%, 1,713 Votes)
  • As long as it is close either way, I don’t mind (28%, 723 Votes)
  • I would rather owe the IRS a lot of money every year (6%, 179 Votes)

Total Voters: 2,615 (poll has ended – thanks for participating!)

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Ryan says

    JvW, Ouch! I hope you were able to take care of it without too much trouble (though I can’t imagine $3,500 being an easy thing for everyone).

    Ron, it just goes to show how difficult it is to predict how taxes will turn out. The tax code is very complicated. And I agree, I would rather be surprised with a refund vs. a payment owed. Either way, I would prefer it be small. ๐Ÿ˜‰

  2. JvW says

    I voted that I want it to be close either way. Unfortunately, we did a lousy job anticipating it this year and owed the IRS $3500. YOWZA! I am going to be playing with tax calculators in the next few days to figure out how to adjust our withholdings next year.

  3. [email protected] says

    I have my withholding set up as married with ten (10) dependents and still manage to get some money back, mostly because of medical deductions and housing interest.

    Still, I’d rather be surprised with a refund than surprised with a payment owed!

  4. Dividend growth investor says

    Its always easier to predict that you will be within a hundred dollars over/under in your taxes if you rely primarily on salary income. If you have other income though, your tax situation changes dramatically. Also, if your income is over $200k there’s a higher chance that IRS will audit you..

  5. Blaine Moore says

    What would I prefer? Owing a lot of money.

    What do I actually aim for? Owing a few hundred.

    What actually happened this year? A ton of money getting refunded.

    The wife being in law school, some business losses, and claiming 10% of my house for business use (one advantage to only having a 900 square foot house I guess…) led to my standard withholding being way too high.

    I’d rather not have given the government an interest free loan, but oh well.

  6. Braunn says

    Interesting. While (as I read this, anyway) the votes for a Refund outnumber the other options 2 to 1, I don’t see any comments supporting that option.

    I did vote for the refund. While I don’t necessarily like the idea of letting the government use my money interest free, I know myself well enough to know that a few extra bucks every two weeks would likely get spent rather than saved. And I like knowing that I can expect that windfall each spring.

    A few cents in lost interest in a savings account earning 0.5% (or even a few dollars from a 3.5% online account) is a small price to pay for the peace of mind that comes from knowing that I won’t get hit with a huge tax bill I hadn’t adequately planned for.

  7. FFB says

    I’d rather keep it close to zero. We actually got a rather large refund this year that had a lot to do with the birth of our son and my wife being out of work for a bit. We re-adjusted our withholding so hopefully we’ll even out next year. While it was nice seeing two refund appear in our ING account, I would rather have had the money all along the past year.

  8. Leah S says

    I’m somebody who comes within a few hundred. The biggest tax refund my husband and I have ever received was in our first year of marriage, $800ish. Currently we get about $300 back from the federal, and always owe the state (it’s set up poorly and everybody seems to owe, no matter the deduction) $137. So I almost broke even at $150. If I wasn’t able to take the tax retirement credit, we’d be owing. Feels like a teeter totter. ๐Ÿ˜‰

    And yes, the taxes were done a long time ago, February. ๐Ÿ™‚

  9. My daily dollars says

    Ideally, I don’t want to be giving the government an interest-free loan. However, this year’s decent-sized tax refund really helped motivate me to take control of my finances. With an instant emergency fund, I was able to get serious about paying off my debt!

  10. No Debt Plan says

    I voted as long as it’s close, I don’t mind… with a caveat. I’d rather is be getting $50 back or be on the other side of the fence. I don’t want to get $3,000 back… means I’ve done something wrong.

  11. Elizabeth says

    I voted for the “keep it close” option but I’d always rather owe money than get a refund.

    My husband usually adjusts his W-2 at least once or twice a year to keep us a close as possible depending on how our dividend income is doing. Since we always keep cash in the bank, paying taxes due is preferable. After all, we’ve had the chance to earn least a little interest on the money throughout the year.

    Paying taxes due is one thing but giving the government an interest-free loan is something else altogether.

  12. Mrs. Micah says

    Best case scenario, small refund. Forced savings can be fun because they give you a big sum to put towards debt or into savings.

    I’d rather give the government a small interest-free loan and not worry about what I owe.

    Blog income makes it trickier, of course, which is one reason we’re sticking with the higher withholding this year. Hopefully we’ll owe less next year.

  13. Dividend Investor says

    It also seems to me that a loan to the government is ok for people who invest most of their money in the stock market through monthly contributions (in taxable accounts in addition to non-taxable accounts). What happens if you have to cough up $1,000 and the market has just tanked? Do you sell your stocks and have an opportunity loss of thousands of dollars in future dividends and capital gains down the road @ your retirement? Sometimes the uncertainty of future outflows to the tax man could make you stick your money in a bank deposit, earning not enough..

  14. David says

    Owing is way better, as at least then they are not getting an interest free loan. That being said, we owed almost $4,000 this year and it kind of sucked. ๐Ÿ™‚

  15. Kirk says

    It hurts to owe a few thousand to the IRS in April, but every positive financial move should hurt a little. Isn’t it more pleasurable to spend money than save it. However, saving builds your wealth and so does owing the IRS.

    One caveat though: if you spend the money that would otherwise go to the guv during the year then it may not be smart. But, if you leverage it by capturing yield during the year and holding off on paying the government until April, it starts to add up. It creates cash flow even if it is only a couple hundred dollars each year.

    But, as we all know, a couple hundred here and a couple hundred there starts to add up.

    If you expect your income to rise, just ensure you give the government 100% of what you owed the year before (110% if your AGI is above $150K). If it is steady, try to owe $1,000 (the maximum you can owe without a penalty). The difficulty hits when you have changes in your life that lower your income as Ryan faced.

  16. Frugal Babe says

    We’ve had it both ways. Two years ago, we owed 6 grand at tax time, and this year we got a $3800 refund. Our tax situation changes all the time, because we own our own business and our income fluctuates quite a bit. Obviously I don’t like seeing such a big refund, because we could have used that money throughout 2007. But I prefered it to the shock we got the year we found out we owed $6000. Overall, I’d rather just be close (last year we owed the state about $150, and got about $300 back from the IRS). I’m making some adjustments now to try to be a bit more on track for our 2008 taxes.

  17. Hustle Strategy says

    Good topic. Most frugal people would rather it be close or owe. I like getting lump sums towards the end of the year. Some advice, get married in December, have kids in December, donate, run big mortgages, etc… Having a kid January 1st has to be rough…

  18. Always Owing the Man says

    I would love to see average income level next to the results. Then the results wouldn’t supprise anyone… right in line with the distribution of wealth. ๐Ÿ˜‰

    My wife is always pissed that everyone at work is getting a refund and no matter how much I explain the time value of money and the fact that you pay the same amount either way, she still complains. We have plenty of money in the bank, so we don’t need the forced savings, but hell, I’m claiming 0 this year just to not have a bigger headache than I have after figuring them out!

    Do what works for you is all I can say.

  19. Ryan says

    LOL. Very true. Too many people just have it in their mind that a big tax refund means they are pulling one over on the government. I’ve known people who needed the forced savings and were willing to admit it. As for me, I’d prefer to be as close to zero as possible. ๐Ÿ™‚

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