Would You Rather Owe Taxes or Get a Tax Refund This April? The Answer Might Surprise You!

Gird your loins, everyone! Tax season is almost upon us.

International readers, today you are dismissed. Go prance off to enjoy your state-sponsored healthcare or hold a wealthy politician accountable for their actions. Or, if you enjoy being baffled and horrified by uniquely American shitfuckery, stick around! Because nothing will make you more grateful to live in Denmark, Canada, or Namibia than the tax laws of the United States.

A few years ago I asked Lauren this question: “When it comes time to file your taxes, would you rather receive a tax refund or owe taxes to the government?”

“Get a tax return. No question,” she answered.

Which surprised me! Because as far as I was concerned, I’d much rather owe taxes than get a tax refund. I told her as much, to which she said “Just wait until your income increases. You’ll change your mind real quick the first time you get a five-figure tax bill.”

So what was that all about? Which Bitch had the right answer? Is there a “right” answer?

Today I want to go over a little-known quirk of the tax system, one that affects taxpayers from all across the income spectrum. And in the end, I’ll go over what you can do about it to save yourself the most money in the coming tax season.

What does it mean to owe taxes?

Here in the good old U.S. of A., we file our tax returns once per year. It’s a needlessly complicated process through which we tell the government how much we think we owe in taxes, and they tell us if we’re right or wrong. If you guess too much, they’ll send you a tax refund check! And if you guess wrong… you’ll owe taxes and send the IRS a check instead.

Civilized countries don’t do things this way. But here we have a strong cultural appreciation for performance art, and so things like the IRS and the TSA persist.

Below is everything we’ve written on taxes. The rest of this article will make a lot more sense if you’re familiar with the basics:

• How to File Your Taxes FOR FREE in 2023: Simple Instructions for the Stressed-out Taxpayer 
• Screw Up Your Taxes? Here’s How To Get Out of Paying Tax Penalties 
• My Taxes Are a Little, uh, Creative. What’s My Risk of Being Audited? 
• Go Ahead and File Your Taxes Right Freakin’ Now 
• Taxes: Your Annual Fee for Membership in Civilization 

Let’s start with those who owe taxes come tax season. This means that throughout the year, you underpaid on your taxes. You didn’t pay enough, and now you need to make up the difference.

Who this affects

This happens to lots of people on all levels of the income spectrum. In fact, nearly one third of Americans weren’t sure if they’d owe taxes or get a tax refund in 2021.

The most common reason you might owe taxes after you file your tax return is underwithholding. Legally speaking, your employer has to withhold taxes from your paycheck every pay cycle. But if they don’t withhold enough, then you’re the one left holding the bag during tax season.

Owing taxes can happen through no fault of your own. Maybe you were self-employed, and there was no handy HR or accounting department to factor taxes into your paycheck on your behalf. Maybe you had a side hustle, or you worked several part times job to make ends meet. Perhaps you’re a business owner or someone with a lot of valuable assets or income-generating investments not factored into a paycheck.

No matter the reason, your tax withholding percentage either wasn’t calculated correctly, or wasn’t calculated at all. You’ll get no judgment from us. And technically, you’ll get no judgment from the government either. Completely free of judgment, they will simply ask you to run the numbers every April… and pay up.

What does it mean to get a tax refund?

When you receive a tax refund, it means you overpaid your taxes throughout the year. The result is that you get a nice tidy refund back from the IRS to say “Our bad—here’s your money back.” They’ll send you the check (or automatically deposit it into your bank account because this is 2023, my dudes) a few weeks after you file your tax return. Which is why it’s important to file that sucker as soon as you can.

You can do all kinds of fun things with a tax refund! Use it to start an emergency fund! Pay off your debt! Open your first brokerage account and start investing! Did I say “fun”?! I meant “responsible and pragmatic”!

Who this affects

Most average earners will receive a tax refund. In 2020, more than three-quarters of folks filing tax returns received a tax refund. That same year, the average refund rose to $3,745. This is largely due to the opposite problem of those who owe taxes: overwithholding.

If you work a 9-5 job with a dedicated accounting team, you’ll probably get a tax refund instead of owing taxes. Especially if those accountants set you up with a conservative withholding estimate. They want to do things right, so they try really hard not to underwithhold.

To owe or to receive: That is the question

Say it with me now:

Personal finance is personal.

There are all sorts of personal reasons why someone might prefer to owe taxes or be owed taxes. For Lauren, she doesn’t want to part with a big chunk of change all at once—she’d rather pay her taxes throughout the year to lessen the blow, just as Dog intended.

But that doesn’t mean that my preference to owe taxes is wrong. (As you know, a Bitch is rarely wrong, and when she is wrong, she usually has a very good excuse for it… unless it’s Lauren, whose only excuse for being wrong is that she enjoys fucking with me. And she knows e x a c t l y what I’m talking about, the sadistic harridan.)

When it comes to the tax return question, my reasons are not entirely emotional. There’s actually a legitimate mathematical reason to prefer owing taxes than getting a refund!

Interest for me, not thee

The thing you need to ask yourself about your tax bill is this: who benefits from it in the short term?

In the long term of course, we all benefit from taxes. They pay for our schools and roads and fire departments. The taxes we pay go toward the good of all, like a membership fee for participation in society. And since I enjoy things like indoor plumbing and electricity at the flick of a switch, I generally don’t resent paying my taxes in the long term.

But what about the short term?

In the short term—say, between when you pay your taxes and when you file your tax return—someone is benefitting from holding onto your tax dollars. If you get a tax refund, that someone is the government. They get to hold onto the extra cash you withheld for taxes for a few months or even a year, using the money any way they please in the meantime. It’s like you just gave the government an interest-free loan, entirely on their terms. And yet we feel grateful when they give our own money back to us in the form of tax refunds!

If you owe taxes, however, then you get to hold onto your tax money a little longer and do what you want with it. You get to use it and—most importantly—earn interest off of it. Sure, the IRS charged a 3% interest fee on taxes owed (more on this in a sec), but that currently pales in comparison to what one can earn in a HYSA or brokerage account.

And since the two ingredients in the recipe of compound interest are money and time… when it comes to the tax question I’d rather profit off the time.

My first five-figure tax bill

It finally happened: My tax bill last year was a whopping five figures. I had earned so much money through my day job and side hustles that I owed taxes to the government.

Yet I still didn’t mind! Despite my fellow Bitch’s prediction, I was still just fine owing taxes instead of receiving a tax return. I’d predicted that I probably owed taxes throughout the year (since I wasn’t filing taxes for my side hustles quarterly), so I set aside the money accordingly. I even kept it in a high yield savings account where it earned me interest at over 4%. Worth it!

So when the time came to pay the litigious, governmental piper, I was ready to cut a check and move on with my life.

But if I hadn’t been prepared? If I hadn’t been a money nerd well-versed in this sort of tax tomfoolery? That five-figure tax bill would’ve sucked harder than the vacuum of space.

The times they are a’changing

Right, so forget everything I just wrote. Those were the Before Times. None of it applies anymore. Sorry ’bout it! It’s useful context for what’s to follow, though, so don’t feel like I wasted your time.*

There’s a new law on the books that, as of this tax year, will make it significantly more expensive for taxpayers like me to hold onto our money if we owe money at tax time.

The IRS will now be charging 8% interest on underpayments. That means that if you owe taxes after filing your tax return, you’ll also owe the government 8% in interest as a penalty for underpaying your taxes.

Considering even the highest interest rates on HYSAs are currently below 5%, the math is much more in the IRS’s favor now, not yours. Instead of personally making a little money on your tax bill by holding onto it longer, now underwithholding could end up costing you. Significantly.

Naturally, the IRS still doesn’t pay you interest for overpaying your taxes. They just charge the penalty percentage for underpaying. Essentially, they want to disincentivize both underpaying and overpaying. The IRS wants your tax money as you earn it, not later.

The solution: Neither a borrower nor a lender be

Now that we’ve established you’re losing money whether you owe taxes or receive a tax refund, it’s time we talk solutions. Because there really only is one: to calculate your taxes accurately, or as close to accurately as possible.

Fortunately, the IRS has a form for that. They’ve got a form for everything! And they’re all called “Form W-9” or “Form 1040-ES” or “Form T-800” so we can only guess at their meaning and purpose! Very exciting.

In this case, allow me to direct your attention to Form W-4. This bad boy is the paperwork you fill out when you want to adjust your withholding.

So if you traditionally owe taxes after filing a tax return, you can fill it out, submit it to your employer, and they will adjust your withholding accordingly. And if you always get a nice fat tax refund… you too can fill out a Form W-4 so you can hold onto more of your money and put it to use faster.

What if it’s too late?

If you’ve already been charged a penalty fee for underpaying your taxes throughout the year, don’t panic. You can still dispute the penalty or request that it be reduced. I can’t speak to the likelihood of this working to wipe out 100% of your tax penalty. But it’s always worth a shot.

After all, the IRS knows that we are busy people with lots on our minds (read: the IRS thinks we’re brainless imbeciles). They don’t expect us to do it all right the first time. And on that note, remember that you can also try the magical IRS penalty get-out-of-jail free card that is First Time Abatement. But you can only use it once, so choose wisely.

As BGR is, in fact, a legitimate business (I know, I know, we’re just as shocked as you are), we pay taxes every year. You can help us handle those taxes by joining our Patreon and contributing a few dollars to our bottom line every month.

Back to the original question: Would you rather owe taxes, or receive a tax refund? Tell us your reasoning in the comments below!

*Bitches Get Riches: Wasting your time since 2017.