Should You Even Want a Tax Refund?

March 24, 2022 Topic: Tax Season Blog Brand: Politics Tags: IRSInternal Revenue ServiceTax RefundsTax Season

Should You Even Want a Tax Refund?

The IRS has been able to keep pace with the millions of tax returns so far.

The ongoing struggles at the Internal Revenue Service (IRS) run far and wide, but it appears that they aren’t hampering the beleaguered agency’s ability to process tax returns and send out refunds this year.

With tax day less than a month away, the IRS has already disbursed more than 45 million tax refunds worth close to $152 billion. This breaks down to an average refund payment of $3,352, which is $400 higher than last year’s amount. In all, the IRS has received about 63.5 million tax returns and has processed nearly 62 million of them.

Americans who received at least the average refund amount were sure to celebrate. But, as pointed out by personal finance expert Christy Bieber at The Motley Fool, perhaps counterintuitively, it could be better to owe the IRS money come tax time.

“When I file my tax returns for the 2021 tax year, I’m going to owe a little bit of money to the IRS. This isn’t very common, as most people end up getting a refund that’s worth a few thousand dollars each year. But, for me, it’s standard,” she writes.

“While this may not sound fun, I actually prefer to owe money rather than get a refund. And I’ve set up my tax payments throughout the year in order to make that happen,” she continues.

Don’t Give Out Free Loans

The chief reason for this planning seems to be that she wants to keep her cash for as long as possible rather than give an interest-free loan to the agency.

“The reality is, if you are getting a refund, it’s not the windfall that it may seem to be at first glance. All that’s happening is you are getting back money that you overpaid and didn’t actually owe. You’re getting your own money returned to you after you’ve been without that cash for months as you waited to file your tax return,” Bieber notes.

“When you pay the IRS more than you owe, there’s an opportunity cost. The money you sent in can’t be invested in a high-yield savings account or in other investments. That means you miss out on receiving the interest or the returns that the cash could have earned if you’d kept it and invested it throughout the year,” she adds.

Avoid IRS Penalties

The one caveat to be aware of is that a taxpayer should pay at least 90 percent of what they owe to avoid IRS-assessed penalties.

According to the financial website Investopedia, the size of the penalty “is calculated based on the outstanding amount owed and how long the amount has been overdue. … Underpayments are subject to the failure-to-pay penalty which is 0.5 percent of the amount owed for each month or part of a month the tax is not paid.”

Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.

Image: Reuters.