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Would You Rather Receive a Refund or Owe More Taxes?

This article was written by in Taxes. 27 comments.


If you haven’t noticed, it’s tax time. I have noticed, not only because of the relentless emails I receive reminding me of this grand celebration, but also due to people I interact with. As those I know complete their tax returns, I observe the joyfulness they exude as they realize they’ll be receiving a refund from the IRS.

Count me in with the masses; my accountant suggested some changes to my tax returns for the past couple of years, and I received several refunds I otherwise wouldn’t have expected. I exuded an appropriate level of joyfulness, as well.

Most people’s tax situations are much simpler than mine. For example, a single guy might work for only one employer, receive one W-2 form, and won’t have much un-withheld income. He will probably receive a small refund. Or: a family receives two W-2 forms and because they didn’t calculate their withholding correctly they’ll receive a large refund.

The federal government should be the one celebrating. They’ve been using “our” money — money belonging to those of us who are due a refund — for free! Usually, when you lend money to someone, you charge interest to compensate yourself for its use. Why would you give the government, an organization that will use your money in ways you may not approve of, a free ride?

The most common explanation — or rationalization — for not being concerned with lending money to the government for free is because this creates “forced savings.” By having more money than necessary withdrawn from each paycheck, you are putting some money aside for later, counting on the government to pay you back on time.

It might be a good idea to note that some state governments are not issuing refunds on time. The states’ financial difficulties will become your financial difficulties when they delay sending you the “savings” you’ve been counting on.

Here’s why “forced savings” is a poor excuse.

  • You are not earning interest. In a high-yield bank account like Discover Bank, the money could earn interest. If you hand excess money to the government each pay period, the government gets to keep any interest it could be earning. You might as well throw money out the window.
  • You don’t have use of the money. The average tax refund, for those who receive one, is almost $3,000. You could have used that money to pay off your debt, repair your house, or invest for your retirement.
  • Saving yourself isn’t difficult. Don’t rely on the government for a savings plan. You can automatically transfer a portion of your paycheck into a savings account. When you re-calculate your withholding and change the form with your employer, set up direct deposit so you receive your pay directly in your bank account. Then, set up an automated recurring transfer to move a portion of your pay to a savings account earning interest.
  • It’s easy to treat a refund wrong. Receiving a large check from the government encourages people to make unnecessary or unplanned purchases. While that might be great for the economy in general, you might be making choices you wouldn’t have been if that money was spread out over the course of the year and incorporated into your weekly or biweekly income.

The federal government counts on millions of citizens overpaying their taxes throughout the year. If everyone optimized their withholding, the government might not be able to pay for its day-to-day operations. Don’t worry about what the government will do; the best decision is to optimize your withholding so you do not receive a substantial refund.

Consider planning your withholding so you owe the government when you file your taxes. In this scenario, all the drawbacks mentioned above become your advantages. You’ve had access to government money throughout the year. As long as you stay within limits, you won’t owe the government any interest or fees. You can earn interest or invest the government’s money, and as long as you can pay your bill by April 15, the government doesn’t care what you do.

Receiving a tax refund is not the worst thing in the world. It’s not efficient for taxpayers, and not the best use of the income you receive from your employer.

When you file your taxes, do you like to receive a refund or prefer to owe the government?

Updated October 24, 2010 and originally published April 13, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 27 comments… read them below or add one }

avatar Bobby Berry

I prefer to owe the government. But if you owe too much they will make you pay your taxes quarterly.

I would also prefer then not take my taxes our of my paycheck and let me pay them at tax time.

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avatar Joseph

I would rather receive a refund! We only had $52 withheld for the whole year. Our tax refund was almost $5,000. I’ll take that ROI. I understand your point though, we could have held on to our $52 instead of the gov. keeping it interest free for the whole year. People wouldn’t mind owing money in April if they were prepared to pay up, but most people are caught off guard.

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avatar Kristen

If you are expecting EIC, you can apply to get part of it throughout the year rather than waiting til tax time. This would be your version of not withholding too much. Of course, your refund might not be due to EIC. Just saying that if it is…..

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avatar Zak

How did they only withheld $52 and you still receive a refund?

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avatar Yana

I prefer to owe the government. I do my best to see that it is not too much, but I don’t want the government owing me. I’m perfectly comfortable managing the household money and don’t have a problem saving to pay taxes. Money is a tool of mine, and I don’t like my tools in the wrong hands.

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avatar Evan

I am happy to get money back. Outside of Uncle Vito I couldn’t imagine a worse person to owe money to than the IRS. That sinking feeling when your accountant or tubo tax tells you you have to write a check for a couple grand. Even if you were to get 5K back from the gov’t and you had it from day one of the year at 1.1% that is only $55 in interest (BEFORE TAXES).

Just some thoughts

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avatar cm

People do get better than 1.1% interest4 even now, but in other years interest has been as high as 15%/year (1980s) or 5% (2006). Assuming you can get 2% now, which you can, on $5,000, that’s $200. And I don’t think you pay federal tax on your federal refund, though you might pay state tax on it, which is much less, like 5-10%. Assume you get that $200 taxed at 10% to account for state and local taxes…

That’s still $180/year, every year, that you are giving the government for no reason at all. If that is fine for you, fine, but would you also check a box on the form that says, “Check here to give hire us as a no-services bank for $180 a year.”? Would you pay that fee for that same no-services bank for $90/year? $45? How much will you pay for the no-services bank?

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avatar Evan

I think the conversation we are talking about owing the government ANY money or getting back SOME money. The taxable part I meant was on the savings IF you were to save it all and had it ALL since Jan 1st.

I think the national average is around a grand for refund purposes which turns that $180 up there to about $20 bucks. But I am ok working with that $180 number. And the answer is yes, I’d rather risk $12 a month (the gain) just for the knowledge that I won’t have to come up with the money in April.

I think it is a rarity that someone owes exactly zero and gets back exactly zero, so if I have to give up 12 bucks a month to be on the getting back side…I’ll be there.

If these numbers were a hundred or more per month then things may change.

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avatar Edward - Entry Level Dilemma

I completely agree with Evan. The “no-interest loan to the government” arguement really isn’t that compelling. My refund is usually around $700. I’d rather get $700 at the end of the year than 13 and a half bucks each week. After all, how many people are going to take an extra $13 and apply it to paying off debt? I took my refund this year to pay for the deposit on my next apartment.

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avatar RainyDaySaver

I see both sides of the argument, so I’m sitting on the fence. But now that I’m a homeowner, I’d rather have the money in my pocket. Unfortunately, with my supplemental freelance income, it’s hard to gauge exactly how much to withhold because the amount of money I make changes annually. So I’d rather err on the side of caution and get back a bit of a refund. I’m more apt to put a large chunk (refund) of money right into savings rather than put aside a smaller amount every paycheck.

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avatar The Biz of Life

You always want to owe some, but not enough to get fined.

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avatar Jason

If I hit it within $1-200 either way, I feel pretty good about it. We started having a CPA do our taxes several years ago, and that’s been a great move for us, especially after two years in a row getting audited. We were not trying to dodge paying our taxes or anything, but some form or another got messed up or had the wrong tick box checked and the IRS sent us a thick envelope saying we owed $15K. TurboTax didns’t catch anything, either. So we hired a pro, who knew all the right forms and exactly what was mis-filed and so on, and it was money well spent to get that matter cleared up. It’s kind of like hiring any other skilled professional or tradesman when you know you are in well over your head.

I get more concerned with the enormously complex US tax code. I wish that it were simplified into another method (national sales tax, flat tax, VAT, etc) so that a lot of the mystery with filing taxes was removed. There are plenty of examples from other countries that employ similar methods to see that they can be made to work, and fund the things we expect to have in a first-world country. Nobody likes paying taxes, but I do like roads, schools, police, firefighters, military, bureaus of weight and measurement and the many other things we take for granted here in the US and that they don’t have in say, Somalia.

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avatar Evan

I agree with the simplification of the tax code, although I’d probably be out of a job lol. The problem with some of those options (nat’l sales tax/vat/etc) is that it is unlikely that they will replace our system, but rather just add to it.

On another different note, we may have roads and schools but Somalia has pirates…just sayin’

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avatar LR

Evan –
I have always told my husband, they will never go to a flat tax or something easy, simply because the IRS is huge and all the accounting firms, tax firms, H&RBlocks’ of the country would all lose their jobs! Not to mention the banking, insurance and financial industries who get a major part of their income from designing and administering “tax-free or tax-deferred” products.

I am curious to know how many people/industries would be affected if we abolished the tax code completely and implemented a flat tax. Maybe if not too many are affected, it would be well worth it to the rest of us for the sake of simplicity and fairness. Again, it will never happen, but…..we thought America couldn’t be highjacked by socialists either – you never know. LOL

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avatar Lulu

I am actually only getting a small refund (less than $50) so I guess I am in the middle, but leaning more towards getting a refund.

I do not like to owe taxes because it means that is an unplanned expense I have to cater for and that seriously depletes my mental reserves. On the other hand I do not want to get a big refund because I would rather use my money to pay off debt or earn interest than have it floating out to the government coffers.

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avatar Steve

Ideally I would owe $999 or whatever other amount is the max I can owe without paying a penalty.

The reality is, trying to hit $999 runs a definite risk of under-withholding. I run the W-4 calculator multiple times per year and it always tells me different things and it never comes out right at the end of the year. So I just aim for $0 and if I get a refund, fine, and if I owe, even better (as long as I don’t owe that penalty.)

One year I was over the penalty line by $20. What’s annoying is that, as I understand it: whether or not you owe a penalty is a binary decision based on the safe harbor rules; but if you do owe a penalty, it seems to be calculated on the whole owed amount. Luckily when it happened I checked a box “have the IRS figure the penalty for you,” and they never got back to me.

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avatar Barbara

I prefer to get a small refund. I wouldn’t mind owing a small amount but I find it too difficult to fine tune the withholding to owe a little but not too much. Especially since my income is rising and my deductions are falling.

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avatar Mel

Frankly, I don’t make enough at the moment for that hypothetical interest to be meaningful. $7? I’d rather lose that $7 in interest than risk underpaying, especially since I have variable freelance income on top of wage income. I don’t think the lost interest income is a meaningful consideration for most people, who don’t make much money.

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avatar Luke Landes ♦127,435 (Platinum)

If we’re talking a few hundred dollars overpaid or underpaid, then it doesn’t matter, but if you overpay your taxes by thousands of dollars, you’re doing yourself a disservice, even if you wouldn’t be earning interest at all. It’s you money, and you should use it or save it how you please at the time you earn it. If you freelance and don’t earn consistent amounts on a consistent basis, that’s a good excuse for not being able to fully plan for taxes, but otherwise, with a consistent income there is no good reason to give the IRS more than necessary.

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avatar Anonymous

As a small business owner I’m always happy if I end up owing just a bit. It’s hard to pay estimated quarterly taxes and end up break even everytime but I get close. I can’t imagine letting the government sit on a bunch of my money every single year.

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avatar Money Funk

First year… I get minimal back from federal and owe state. It’s just about a $0 balance year for me. Couple hundred back in my pocket. Don’t want to owe.

So this year, I increased my 403(b) contributions. Hoping it will offset any potential future ‘owe’. And it might help considering my husband is working tons of OT this year.

BTW, will u readd my pending FB status. Love the profile pic. ;)

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avatar H Lee D

I prefer a very small refund. Less than $50. So I don’t have to mess up my budget with a check to the feds, but I don’t like to get back too much for the reasons already listed.

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avatar Single Guy Money

I would much rather owe a couple hundred dollars instead of giving them a free loan throughout the year. I’ve got it down to a science and this year, I only owed $12.

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avatar CommRE

This will never happen, but I think it would be real interesting if no one’s tax was withheld throughout the year and we all had to stroke a check on April 15th for the tax owed. I bet a lot more people would think a little more about what they are sending to the government and how they are spending it (not to mention what they are borrowing to spend even more).

That being said, I am in the “get it as close as you can” camp. I have not done real well with that though. 2 years ago we owed 6k, last year broke even within a few hundred dollars, and this year got 5k back.

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avatar Edward

A lot of you are missing the fact that it’s not necessarily a 1% (or similarly low) return from saving the money you get back. If you have any debt and would use that money to make early payments to the debt, you are getting a substantially higher return.

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avatar Darren

Since I’ve both owed a bit of money and received a fairly large refund in previous tax years, I’m a bit torn on this issue.

I don’t like to owe money at tax time, because I don’t like sending the IRS money. I know that technically, I had the use of their money throughout the year. But for some reason, the act of having to pay money to somebody, or anybody for that matter, hurts a bit. Maybe it’s a mental issue. I’m no psychology expert, so I dunno.

On the other hand, I don’t like receiving a large refund either, because I do understand that the government has been using my money without giving me any interest.

So it’s really not an easy choice to make for me. If I had to choose one, ideally I guess I’d like to owe just a few bucks to them!

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avatar Mike Corbin

I used to get a few hundred back. I never tried to ‘work the system’ or fix my return to allow me to receive more of a refund. Many of my friends got in trouble that way and got audited.
I’m excited if I get anything back these days.

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