Many people look forward to getting their tax refund checks, there are also benefits to owing a small sum to the IRS at tax time. The pros and cons of each approach are discussed in this post.
Pros and Cons of Getting a Tax Refund
Getting money at tax time feels good. It may be the only reason some people make the effort to do their taxes—they want that nice refund check.
A tax refund check can also be a forced-savings tool. If the government is holding your money, you can’t spend it. Then, at tax time, you get access to the savings you’ve built up over the course of the year.
Getting a refund check also allows you to avoid underpayment penalties or a surprise tax bill when you file your return.
One of the major drawbacks of getting a large tax refund is that the U.S. Treasury doesn’t pay you interest for the right to hold your money during the year. If you had lowered your withholding or estimated tax payments and invested your extra earnings, you could have grown the money you’re getting as your tax refund.
Pros and Cons of Owing Taxes
If you owe at tax time, that means you weren’t letting the government take an interest-free loan of your money during the year. You had access to all of your after-tax earnings throughout the year to spend, save, or invest as you saw fit.
You may have also used this money instead of relying on credit for certain expenses. That saves you the interest and fees needed to get a loan.
If you owe at tax time, you need to pay closer attention to your taxes throughout the year. You don’t want to end up owing too much in back taxes at tax time, or you could face underpayment penalties. The lump-sum tax obligation at tax time could also cause financial difficulties, particularly if you weren’t expecting it.
However, if you have trouble saving money or just like the feeling of getting a tax refund check, it may be worth the opportunity cost to let the government hold your money during the year.
There’s no single correct answer for every taxpayer, so just be aware of the tradeoffs of each approach and choose the one that’s a better fit for your situation.
The Gartzman Law Firm offers tax return preparation and tax settlement help. Use our contact form to request a consultation with an Atlanta tax resolution attorney.