Why I’d rather owe taxes with my return Image source: Getty Images. Let’s be clear. When you receive a tax refund, that’s money you earned, but the government held onto it for several months before it gave it to you. It doesn’t give you any benefit for giving it a loan: No interest payment, no bonus, no super secret tax deduction, nothing.
But that’s not too dissimilar from what’s happened when you find out you’re receiving a tax refund from the IRS. Overpaying that loan was a mistake. It may have caused increased financial stress due to lower cash flow, and that money could’ve been put to better use like buying groceries, paying down debt, or investing.
On the other hand, if you file your taxes and find you actually owe the IRS, that means you got to benefit from holding onto that money longer. If you plan properly, this can be great news. Whoops.
Here are a few: Your spouse started working. If your spouse started working last year, receiving a similar wage to your own, you probably didn’t update your W-4 to withhold taxes at the higher single taxpayer rate. Your employer doesn’t know you have other income coming in, so it’s not withholding enough.
You got a divorce. If you separated from your spouse last year, but your employer is still withholding taxes as if you’re married filing jointly, you might underpay throughout the year.
Your child no longer qualifies as a dependent. If you have fewer dependents to claim, your taxes go up.
Fewer deductions. If you refinanced your home to a lower interest rate, paid less in property taxes, gave less to charity, or put less in your tax-deferred retirement accounts like an IRA or 401(k), you’ll have fewer deductions. As a result, you’ll owe taxes on more of your income.
You had capital gains. Your brokerage isn’t going to withhold taxes for gains on the sale of stocks and other securities.
You took a large distribution from your retirement account. If you withdrew more money than usual from a tax-deferred retirement account, you’ll owe additional taxes. This also applies if you took the opportunity to do a Roth conversion.
You started a side hustle. If you run your own business as a sole proprietor or partnership, not only will you have additional income to pay taxes on, but you’ll also have to pay self-employment tax.
Changes in the tax code. When the tax code changes, it can have a big effect on how much you owe. There are a lot of reasons your tax liability might have changed over the last year, causing you to owe more than what your employer withheld from your paycheck or you paid in quarterly estimates.
Why you owe taxes this year Personally, I’d rather have my money as soon as possible. If the price of keeping more of my money now is owing some of it to the government a few months later — money I’d owe anyway — I’m more than willing to pay that price. It’s a lot easier to write a check to the government in April when you had bigger paychecks every month the year before.
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