It’s Better to Owe Taxes

Peeve Week - Coins on Fire

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.

17 thoughts on “It’s Better to Owe Taxes

  1. 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!"

  2. Jacob says:

    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!

  3. cetroyer says:

    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

  4. lety says:

    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.

  5. 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.

  6. Wayne says:

    Which is why we should get rid of the IRS. I owe 1,000 dollars in taxes and I’m in very poor fiscal shape. I am honestly scared about feeding my family this year. I hate the government, and I hate the IRS.

    • Tim says:

      Yes. One day the smart people will unite and overthrow the irs They are fraudulent to the core. P.s. Listen to “a perfect circle”

  7. The only problem with trying to trim your tax withholdings is that there is a heightened risk of owed taxes that will collect interest and penalties. Do you seriously want to end up paying more? Or do you just want to receive payment on the interest free loan tha the government steals from you?

  8. Taxes will only collect interest and penalties when they cross a certain threshold. I only had to pay interest and penalties once and it was still worth the cost to have use of my money every month.

  9. I learned this back when I was self-employed. Every quarter I had to pay my own taxes. When you have all the money you earned, and then have to turn around and send it off to the govt, you gain an entirely new perspective on earning money and how the government spends it. I think everyone should have to pay their taxes from their own bank account instead of having it payroll deducted.

    As a side note, I hear people in KS who are owed a refund of their state taxes are not getting it anytime soon as KS is out of $$. How mad would that make you??

  10. The reasoning behind this post is right. If someone owes money to the government at tax return time, this person has been using some money the government would have collected and used itself, had the circumstances been different.

    But this plays better for those who have to invest their money to make a living than for those who receive a salary for a living and who mainly spend it for consumer goods.

    Those who have to invest for a living run a chance to actually get a return on that extra money owed to the government, and to grow their income.

    Those who get a salary for a living only get to spend the money later, when the government refunds their over collected money.

    As the government pays back the over perceived money in a lump sum, those people have the impression the government has been acting like a bank with the money.

    Except the government has been collecting the interest on it and not themselves.

  11. Your friend is the reason why the average U.S. citizen is in debt and doesn’t know how to properly manage their finances.

    I would gladly owe to the IRS each year than receive any kind of refund. It means I’ll have more money up front for investments than if I had withheld more. If you are getting large refunds each year, THEN you’re doing something wrong (unless of course you have a large amount of deductions and whatnot).

  12. Thomas says:

    A tax refund is my vacation money and I rather get a refund than owe the government. Everyone says oh that tax refund is money your loaning the government interest free. On the other hand then I should close my checking account and savings account because I’m loaning the bank interest free money??? I’m speaking the terms of the working person that lives from paycheck to paycheck checking or savings account. Not the richmans accounts that you have to have a min of 20,000 to make real interest worthwhile that banks offer.

  13. I don’t know what size your refund usually is but a $2000 refund is $38 / week and that’s enough for a tank of gas a week in most small cars.

    Being a “working man” is even more reason to get as little back as possible so you can have your money every week to live on.

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