It’s Better to Owe Taxes
It’s better to owe taxes than it is to collect a refund.
Are you scratching your head over what you just read? You’re probably not the only one.
Last year I owed the United States Government several hundred dollars in taxes. When I told this to one of my friends, my friend looked at me and said, “You must be doing something wrong.”
“Doing something wrong?” I asked. “How is that?”
“You’re not getting any money back.” My friend explained.
“So why is getting money back a good thing?” I asked, hoping for some insight into my friend’s thinking.
“Because. You get to go on a spending spree.”
“So why not get that money up front instead of waiting a whole year to use it?” I asked.
I received a blank stare. My friend didn’t get it.
An Interest Free Loan to the Government
Essentially, a tax refund is the Government paying you back for money you overpaid in taxes that year. However, you must look at a refund objectively. What was the Government doing with that money while you didn’t have it? If I were the Government, I would put it in an interest-bearing account and make some money.
So when you receive that tax-refund, the Government is more-or-less saying, “Thanks for the loan. It’s all yours now.”
Cash Up Front
If you owe money, however, the reverse is true. Say you find out you owe five hundred dollars to the Government after filing your taxes. The five hundred dollars you owe is money that you have that the Government doesn’t.
What if you could predict a year out how much money you were going to owe to the Government at the end of the tax year? You could theoretically put that money into an interest-bearing account up front and pay off the Government when the time came. In essence, the Government has loaned you the money for an entire year interest free.
The Bottom Line
If you owe money, you’ve suckered the Government into an interest free loan. If you receive a refund, you have loaned the Government money interest free. Are refunds a good thing? I suppose. But you could have had that money all along without the Government holding onto it for you.
Join the Discussion (6 Comments)
Somebody gets it! In addition to this I always request 9 witholdings from my W4 when I sign up for a job. This only works when one can save 10-15% of their income or more (gross pay) so that they aren’t coming up short in mid-April. “Spending spree, indeed!”
Posted on January 19th, 2007 at 7:50 am
Just a clarification on my part (the conclusion kind of left me scratching my head…):
If I get a refund from the gov’t at tax time, that means that I overpaid the gov’t the last year. I didn’t give the gov’t an interest free loan; I lost the interest that that money would have made for me had I had possession of said funds. The gov’t got away scot-free with my interest (and held onto money I could have used, for that matter).
And if I have to pay, well, those funds stuck around in my bank and worked for me instead of the gov’t for a while.
Just make sure you can pay the taxes when the gov’t comes calling.
cetroyer
Posted on January 19th, 2007 at 11:39 am
I let the government take my money because if I have money Im gonna spend it.. Then I will go to prison for not paying my taxes.. but instead they hold on to my money then I go crazy and boost the economy! It’s a safety net thing…MO MOney MO Problemo’s!
Posted on January 19th, 2007 at 12:34 pm
i tried to do this last year. when i filled in all my paperwork i put down withholding yet i was still paying taxes every week. i didn’t want to go through the trouble with HR so i forgot about it, but now i wish i hadn’t. next time will definitely be different! it makes sense to me now. thanks for writing.
Posted on January 24th, 2007 at 11:12 pm
Thanks for the comment lety,
One thing to note here is your tax bracket. Say for example that you are in the 15% tax bracket. If you have minimal taxes coming out, make sure you are setting that 15% aside every paycheck. The best thing to do with this is put it into some interest bearing account such as a CD or money market. When tax time comes up, you keep the interest off the top and pay the Government with the saved amount.
Some people can’t save the money and these are the types of people that need the refunds unfortunately. A tax refund is almost a forced savings account and the Government lets you have access to it once a year.
Another thing you can do with the money is pay off debt. If you have a lot of credit card debt that has a twenty-percent interest rate, you could use the extra money to pay off the debt. You are earning money in the long run because you aren’t paying as much in interest. Just make sure you have enough to pay off the tax man when the tax man cometh.
Take care.
Posted on January 24th, 2007 at 11:22 pm
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Posted on February 7th, 2007 at 7:57 pm