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.