Tax Time: Understanding Pros And Cons Of A Refund And Bill

Originally Published March 2, 2015

At my bustling firm in Kansas City, Missouri, and all across the country, we’re deep into tax season. For my team and me, this typically means long days and longer nights. The looming question that every client wants to know is: “Do I have a refund coming, or will I owe Uncle Sam?

Many think the objective is to get a refund. However, if you talk to any respected financial planning expert, they will tell you that lending out money for a year without earning any interest is a poor investment strategy.

Essentially, this is what taxpayers do when they receive a refund. It’s shocking to some but nonetheless true, and here’s why. You could have an instant pay increase by changing your withholdings

to get more of your own money during the year. Save your own money and gain your own interest, or pay off some debt and accrue interest, which is still money in the bank.

Typically the next question is, “How much is my refund? The larger the refund, the more your pay increase could be. Hold up! Can we conclude that it is better to owe the IRS than to receive a refund? Well, it depends on your ability to pay at the end. If you owe, you are expected to pay on or before April 15. Failure to do so by the deadline could result in penalties and interest.

So which is more beneficial to you? It’s based on your financial discipline and objective. If you can be financially balanced, then your goal should be to break even or have a small balance due. If you tend to lack financial discipline, then a refund may work in your favor.

Consider these three quick guides to assist you in the process:

1.  Determine if you desire a refund or if it is your objective to break even.
2. Talk with your tax professional to determine the necessary steps to help you achieve your desired bottom line. For instance, this could be W-4 adjustments, a new business structure, or timing of income and expense.
3. If you are due a refund, determine the best plan to use it wisely. If you are going to break even and get more during the year, then make sure you use “your surplus to benefit your financial position.

Whatever you decide, be committed to your plan, execute your plan, and understand that this is your money. Keep in mind that a refund isn’t always a free pot of gold at the end of a rainbow, so make sure you’re not colorblind this tax season and make wise financial decisions. The advice that a good uncle would always tell you!

Marquita Miller is the founder and CEO of Five Star Tax and Business Solutions

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