Comments on: Tax Bill or Tax Refund, Which is Better?

By: JK

JK — Thu, 24 Aug 2006 11:35:32 +0000

On my previous reply, I forgot to leave my email address.
TaxPlan4u@aol.com

Thanks and have a nice day!

By: JK

JK — Thu, 24 Aug 2006 11:12:47 +0000

I am an accountant who has prepared Federal and State income tax returns for the past 24 years. No matter how I advise my clients, everyone has a different opinion on receiving a refund or owing taxes. Some people believe that receiving a large refund is a forced savings, even though the Federal government is in fact working with their money, whereby if they were to plan better, they could receive more money each pay period and invest this money in a conservative interest bearing instrument and yield more money by year end. On the other hand, I have clients who will owe Federal Taxes at year end, and don’t mind paying the U.S. Treasury, even if it includes paying a penalty. The penalties for underpayment of federal taxes really are not that large, and therefore, appear to be a small penalty to pay, for owing the tax. It’s like paying a cheap interest rate for borrowed money, that you now have to pay back. Someone made a suggestion above, that they had considered no Federal taxes withheld from their (employee) paycheck, then invest the amount of federal taxes that would be withheld, and then earn interest on that money. Great idea (from a financial viewpoint) however, just remember that the Federal government’s rule is for anyone with taxable income to “pay as you go”. Therefore, whether you are an employee or self employed, you should pay your estimated taxes by the due dates, as set forth by the Federal government’s guidelines and published due dates. If paid on time, I don’t know of any rules being broken, therefore you would earn “some” interest on those funds reserved for Federal taxes withheld from your paycheck. Remember, you would have to file a W-4 with your employer to claim “tax exempt” and then take personal responsibility for your personal Federal income tax liability. I must also mention, I haven’t reviewed the recent guidelines on W-4′s, and therefore you should research whether you can legally claim tax exempt without having the I.R.S. refuting this status. If you can claim tax exempt on your payroll, you really need to pay attention to the estimated tax due dates, and pay the amount on time. According to recent articles published by the I.R.S., agents are going to start paying closer attention to small businesses that are not paying estimated taxes by the due dates, and possibly enforcing underpayment penalties, since some (self-employed) taxpayers won’t make their estimated taxes when due, and wait until year end to pay any tax due.
Please contact your personal tax advisor or me at my email address if you have any more questions.

By: Scott Mitchell

Scott Mitchell — Sat, 25 Feb 2006 07:02:48 +0000

I think there’s a secondary benefit in owing the government a big fat check at the end of the year – it gets you mad. It makes you want the gov’t to account for the taxes they take from you and, hopefully, prompts you to be more proactive in the political process. A lot to ask/hope for, but I firmly believe if the gov’t didn’t withhold ANY money and made everyone pay a big check at the end of the year, we’d quickly have a more reasonable tax code/rate.

By: Caitlin

Caitlin — Thu, 23 Feb 2006 00:23:36 +0000

"modest refund" is really the sweet spot. I even used the IRS's withholding calculator early last year and I am still due over $400 in a refund before factoring in all the non-cash donations we made. Speaking of which...I better file my taxes asap and get that money! LOL

By: RS

RS — Thu, 23 Feb 2006 00:13:30 +0000

I am awful at estimating my withholding. The past 2 years running now, my wife and I have owed about $6000 each year and it is killing us. They really need to simplify the tax laws to make all of this easier to figure out. I screwed myself because we moved out of one house 1/2 way through a year, lived in an apartment for a year, and then moved into our new house 1/2 way through another year. This left us without 1/2 our interest deduction for 2 years running now and left us owing a lot.

By: Nick

Nick — Wed, 22 Feb 2006 18:38:04 +0000

Small tax bill all the way for me! And I would’ve had just that this year if I didn’t get married in the middle of it and forget to adjust my W-4. But trying to hit the small target between 90% and 100% of your taxes can be tricky, so I won’t be too upset if I get a small refund … say, 1% of AGI.

By: Flexo

Flexo — Wed, 22 Feb 2006 17:49:09 +0000

When it comes down to it, I prefer a modest refund as well. My latest 2005 tax calculaton shows I’m due a refund for $12 (much better than my early estimation of owing $2,000). I wouldn’t say that having that $12 throughout the year instead of the refund would have benefited me in any way.

By: FMF

FMF — Wed, 22 Feb 2006 17:44:12 +0000

I’m with Bill — a modest refund is ok for me.

By: Flexo

Flexo — Wed, 22 Feb 2006 17:25:47 +0000

The system is a bit complicated. The penalty is for all income-earners, not just the self-employed. If you're getting a refund, there's nothing to worry about, but if you owe more than a certain amount and you meet some other conditions, you could owe a penalty. This article and this article from The Motley Fool explain the nuances in good deail. The numbers are a few years old, but the information should be generally the same for the 2005 tax year. The author has updated some details for 2005. Here is another resource.

By: Lori

Lori — Wed, 22 Feb 2006 17:11:34 +0000

Ok so I was reading what you had to say about owing the gov’t a penalty if you don’t have enough taxes taken out of your paycheck during the year. Can you expound on this. My husband and I were thinking about setting up his paychecks at work so that no federal taxes come out of them, and then just put the amount that would have come out of them each week in our HSBC account and let it earn interest. This year we actually got more money back from our tax return than what we paid in (because of our student loan interest and because of the child tax credit) so we will probably get a refund next year even if we have no taxes taken out. So if we set it up so no federal taxes come out of his check will we really have to pay penalities, or is that just for self employed people? Thanks

By: Bill

Bill — Wed, 22 Feb 2006 12:07:06 +0000

I’d prefer a modest refund ($50 – $100 or so). Using the same theory that you don’t miss items deducted directly from your paycheck such as 401(k) contributions, charitable deductions, etc., taxes work the same way psychologically for me. I don’t mind them coming out at paycheck time, but paying them in April by writing a check bugs me to no end, even though I’ve saved more than enough during the year. Once my paycheck is direct deposited, it’s my money darnit, not the government’s.
As I’ve written on my blog recently, though, my tax estimation is terrible. Too many life changes that also change tax liability. Relocating in 2005 really threw me off…the reimbursements from my employer had tax withheld significantly higher than my effective tax rate.

By: Flexo

Flexo — Wed, 22 Feb 2006 09:49:19 +0000

Thanks for the reminder! I added some information on that penalty above.

By: mbhunter

mbhunter — Wed, 22 Feb 2006 08:48:04 +0000

I should do a better job with my personal exemptions, since I usually get a large refund. The flip side is that you can carry too many exemptions, and not pay Uncle Sam enough throughout the year. Then you owe penalties.