Tax Bill or Tax Refund - Which is Better?

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Last updated on April 5, 2021 Comments: 10

Every year at tax time, there are a couple of typical responses from tax filers. Either, “Yay, I get a big, fat check!” or “Oh, man, I have to write a big, fat check!”

Either way, you’re just settling the account with Uncle Sam. Each year, you owe a certain total amount of taxes. Your taxes are actually due on a pay-as-you-earn basis. So you pay them out of your business income or W-2 employer income throughout the year. If you pay too much throughout the year, you get money back. If you don’t pay enough, you owe money (and also, in some cases, a penalty).

So is it better to owe the IRS money or to get a tax refund? Well, that’s a discussion worth having. Each option has its pros and cons. Here, we’ll discuss the pros and cons of each, as well as how you can get your tax refund or taxes owed as close to $0 as possible.

Pros and Cons of Owing on Taxes

Writing a big check to the IRS–or even a small one–doesn’t sound like fun. But there are actually upsides to this option. When you owe taxes, though, you also have to pay a penalty. As long as you settle up in full when you file your taxes, the penalty is minimal. It’s basically paying the IRS interest because it didn’t get to use your money for the rest of the year.

But even with that penalty, owing taxes could be a better situation for you than getting a tax refund. Here are some pros and cons to consider:


  • You haven’t paid the government too much through the year. When you owe taxes, you know the government hasn’t had free use of your money for a good chunk of the year.
  • Instead, you can earn interest. If you can invest your money to earn interest–more interest than the penalty the IRS charges–you’ll come out on top with this strategy. Alternatively, you could use some of the money to pay off high-interest debt, which is essentially the same thing.


  • You have to be ready to write that check. The taxes owed penalty from the IRS isn’t huge. But if you have to put your taxes owed on a payment plan, the penalties can seriously add up. So it’s best to keep that money in savings so that you’re ready to write a check when you file your taxes the next year.
  • You could lose or spend the money. This is linked to the above. If you use the money you should have saved for taxes or put it into a risky investment, you could be unprepared to write the IRS a big check at the end of the year.
  • Interest rates are still pretty low. You may not be able to find a stable investment where you can out-earn the IRS’s fees right now. Even with interest rates on the rise, they’re still very low for savings accounts, so you’ll have limited gains from this strategy.
  • You really are supposed to pay taxes throughout the year. Paying absolutely no taxes during the year may not be a great strategy. You might try to under-estimate your taxes, but legally, you’re supposed to pay them as you earn them.

How to Do It Well

With this strategy, you just want to under-estimate the amount you should be paying in taxes. If you’re running a side gig, for instance, you can pay a small percentage of your earnings quarterly to the IRS, but don’t go all the way up to the 25% or more you could ultimately owe. Or you can take an extra deduction on your W-9 for your employer. This will bump up your paycheck because you’ll pay the IRS less money.

The goal here isn’t necessary to pay all your taxes in a lump sum at the year’s end. But you can hold back some money to ensure you aren’t over-paying. Just be sure you keep the money someplace safe, like a certificate of deposit that will mature when you need to pay your taxes or a money market account. This will net you some interest earnings without running the risk that you can’t pay your obligations at the end of the year.

Pros and Cons of Getting a Tax Refund

Getting a tax refund seems like fun. It’s a big check that you feel like is “free.” But that money really should have been in your checking account earlier in the year, to be useful for paying off debt, buying things you need, or investing. Here are some pros and cons to getting a tax refund:


  • It’s a forced savings vehicle. Many people intentionally over-pay on their taxes throughout the year as a sort of forced savings. You give too much to the IRS out of each paycheck. You barely notice it coming out, but at the end of the year, you get it all back. If you’re terrible at being a disciplined saver, this can be one way to get started.
  • It comes out incrementally through the year. Since the money comes out little by little through the year, the refund can be a nice surprise. A few bucks a paycheck may not seem like much, but multiplied by twelve months, it can turn into a nice little nest egg.
  • You can use the money well. If you’re like most taxpayers who regularly get a refund, you probably have a plan for the money. Since it comes in a lump sum, it can be easier to make a solid plan to use the money well. If you use it to pay off debt, sock away savings, or meet another big financial goal, you’re using it well. If that money came in with each paycheck, you might have just frittered it away, instead.


  • You don’t earn interest on that money. A hundred dollars per month over the course of the year is $1,200 no matter how you slice it. But if you pay that money to the IRS, they earn interest on it by putting it to use. You do not. If you’d saved that money in a high-interest account all year, you’d have a bit more than if you wait until the IRS pays it back to you (without giving you any interest, I might add!). And if you’re carrying high-interest debt, paying off that debt would make your money go even further over the course of the year.
  • It doesn’t build good savings habits. As a forced savings vehicle, over-paying on your taxes seems great. But it doesn’t really build good financial habits and that discipline you need to be a truly good saver. You’ll never save for your whole retirement with this strategy, for example. And you may need to practice physically transferring money to your savings account as a discipline to really build this skill.

How to Do it Well

If you’re struggling to save money or pay off extra debt right now, planning for a tax refund can be a good stepping stone to more financial discipline. But you really should try to estimate your taxes paid so that you aren’t getting a huge refund each year. Instead, shoot for a few hundred dollars that you can save when you file your taxes.

In some cases, such as with the Earned Income Tax Credit, it’s impossible not to get a refund. With this credit, you’re getting money in a refund that you didn’t actually pay to the government. So if you’re in this bracket, don’t worry about getting a hefty refund each year! Just use that money wisely so that you can better your financial situation year by year.

Getting or Giving Close to $0

Ultimately, if you’re a disciplined saver, the ideal tax situation is to get your refund or taxes owed to as close to $0 as possible. Some years, this will be difficult. Maybe you have a baby near the end of the year, or you change jobs and get an income boost. Any major change in your financial situation can make it difficult to estimate your taxes. But the goal should be to get everything as even as possible.

That way, you can save or spend your own money throughout the year, and you don’t have to pay the IRS penalties on top of the taxes you owe when you file. You can use the IRS’s calculator tool to try to figure out what you should pay in estimated taxes throughout the year here.

Sometimes, it’s okay to strategically under-pay or over-pay on your taxes. But your goal should be to get to the place where you don’t have to do either because you’re making great day-to-day and overall financial decisions.

Making decisions regarding taxes is not an easy task. So instead of working hard and wasting time, your better get yourself a subscription with online tax software. Using an online tax prep software will save you a lot of time and effort. You will also be able to consult with a tax expert regarding any decision you will have to take.

If you would like to learn more about how to navigate your taxes, check out the informative course offered by Cofield’s Concepts.

Article comments

Anonymous says:

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.

Anonymous says:

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.

Anonymous says:

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.

Anonymous says:

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.

Luke Landes says:

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.

Anonymous says:

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

Anonymous says:

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

Anonymous says:

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.

Luke Landes says:

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

Anonymous says:

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.