I was wondering if someone with a financial background could answer this for me. I have heard plenty of debate on if it is better to pay taxes or receive a refund. I always hear “giving the government a interest free loan”. What is the best option in your opinion?
Taxes
- Thread starter Cycloneman24
- Start date
I've always written a check on April 15 and feel that I had that money several months that the IRS didn't.
It's all personal preference. Don't let anyone tell you different.
In the end it probably doesn't matter. Just do what works for you.
Ideally your taxes should end up at zero. You owe nothing, and no refund is coming to you. That's obviously really hard to do. But IMO the question isn't "which is better" but rather "which is better for you?"
If you have the wherewithal to pay at the end of the year should you owe on your taxes, and don't mind doing so, then by all means do that. You keep more of your money during the year to use as you see fit.
But if you live paycheck-to-paycheck and can't afford a sudden large payout, or if you don't have the discipline to set a little aside to prepare for a sudden tax bill, or if you like the idea of getting an annual "bonus," then have more withheld from your pay and get a refund. For some people it functions as a forced-savings mechanism that they couldn't discipline themselves to do otherwise.
Yes, a refund is an "interest free loan to the government" but IMO that effect is exaggerated because we're talking about a relatively small amount of money (a few thousand dollars, typically) and it assumes that you invest the money and earn a good return on it. If you had the use of $5,000 for the full year (which you wouldn't, since it's coming increments from your paychecks) the difference between a high-interest money market account and a mutual fund earning 7% for the year (which is no sure thing in itself) is under $250. Not nothing, but not some huge windfall either.
If you have the wherewithal to pay at the end of the year should you owe on your taxes, and don't mind doing so, then by all means do that. You keep more of your money during the year to use as you see fit.
But if you live paycheck-to-paycheck and can't afford a sudden large payout, or if you don't have the discipline to set a little aside to prepare for a sudden tax bill, or if you like the idea of getting an annual "bonus," then have more withheld from your pay and get a refund. For some people it functions as a forced-savings mechanism that they couldn't discipline themselves to do otherwise.
Yes, a refund is an "interest free loan to the government" but IMO that effect is exaggerated because we're talking about a relatively small amount of money (a few thousand dollars, typically) and it assumes that you invest the money and earn a good return on it. If you had the use of $5,000 for the full year (which you wouldn't, since it's coming increments from your paychecks) the difference between a high-interest money market account and a mutual fund earning 7% for the year (which is no sure thing in itself) is under $250. Not nothing, but not some huge windfall either.
From a financial standpoint, more money in your pocket is better than money out of your pocket. So meaning, it is better to owe taxes in the end rather than getting a refund. As others have said, if you invest the money throughout the year that would have otherwise been used for your refund, you would end up with a small gain on the money. So if you were to keep $1000 during the year that would have been used for a refund and invested it in in a bond fund earning 3.5%, you'd end up with $35 more by the end of the year as opposed to nothing if you got a refund.
On the flip side, a refund is a way to save money throughout the year as you won't be able to spend it until you receive the refund. However, this works so long as you put the money into savings as opposed to spending it right away.
I have a degree in finance, and I always shot for getting a refund. However this year, I will owe some taxes due to the changes in the tax rules.
Having said all that, do what is best for you. There was a guy on here said that he used to always get a refund but then changed to owing taxes due to an issue on his taxes. From what I can recall, he stated he was owed a bigger refund than what the government was showing. since it was a refund, he felt the government was not trying too hard to review his tax returns. He felt that if he owed money and there was an issue with his taxes, they would try hard to fix.
On the flip side, a refund is a way to save money throughout the year as you won't be able to spend it until you receive the refund. However, this works so long as you put the money into savings as opposed to spending it right away.
I have a degree in finance, and I always shot for getting a refund. However this year, I will owe some taxes due to the changes in the tax rules.
Having said all that, do what is best for you. There was a guy on here said that he used to always get a refund but then changed to owing taxes due to an issue on his taxes. From what I can recall, he stated he was owed a bigger refund than what the government was showing. since it was a refund, he felt the government was not trying too hard to review his tax returns. He felt that if he owed money and there was an issue with his taxes, they would try hard to fix.
Uhh no. I've invested at a 62% return the past year. I had a refund around $2,450 in taxes last year. I take that $2,450 and turn around and invest that I come out ahead at $3,969.
Can you save? If you owe taxes, you better have the money. The penalty for late taxes is a lot more than you're going to earn on interest.
Some people get money and have to spend it, others can manage money and prepare for future or unexpected bills. Which are you?
I believe that you keep it as close to zero as possible.
Some people get money and have to spend it, others can manage money and prepare for future or unexpected bills. Which are you?
I believe that you keep it as close to zero as possible.
That is not normal and can't be expected by everyone every year. Good job though!
Very few people are going to earn 62% on an investment in a year, and the few who can are very unlikely to replicate it over time. I can't believe an accountant would peddle this as legitimate advice.
Curious if he uses that information with his clients. Actually if he can consistently make that return, he doesn't need clients.
Best option is to come out to $0, I prefer to pay a small amount.
To each his own.
I prefer a large refund. I have racing bills that are due in Feb/March so I use the refund on those. A large refund at that time is more beneficial to my situation
If you try and set it up to owe some money at tax time make sure it isn't "too much" or you will get hit with underpayment penalties.
No. I don't have the discipline to pay off the balance like you should. Until it's tax time that is. Then my return goes to the life sucking banks.
