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Tax Refund vs Tax Obligation (1 Viewer)

Would you rather owe the IRS or be due from the IRS?

  • Owe $1,000

    Votes: 27 27.6%

  • $1,000 Refund

    Votes: 71 72.4%
  • Total voters
    98
Buck Bradcanon

Buck Bradcanon

Footballguy
Your total tax obligation for the year is the same in either scenario.  Would you rather set it up to receive $1,000 or owe $1,000 in the spring?

 
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The problem is that you rarely know ahead of time what it's going to be.  In my formative tax-paying years, I had to pay in 2 years in a row while I was in college.  When you don't have cash sitting around, getting hit with an unplanned bill sucks.  Even though I am in a much better financial situation now, I still dread having to pay in.  Windfalls are so much better.  And $1,000.00 isn't huge.  If it were much larger, I'd probably start calculating what kind of loss I'm really eating with that $2,000.00 swing, and rethink, but my return has been in the $500.00 to $2,500 range.

 
For $1K+, I'd prefer the refund.  I'm sure the "breaking point" would fall differently for different people depending on overall cash flow picture. 

 
Anyone with an understanding of how this works would choose to receive the money now rather than later. If you disagree, you're turning down a 0% interest loan just to have someone else hold onto your money for a year.

With that said, I recognize that for some people there's emotional value in giving someone $, forgetting about it, and then being 'gifted' it back to you the following year. I don't agree with it, but I get it.

 
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At $1,000, you start to get into the possibility of owing a penalty for underpayment, depending on the percentage of total tax liability that represents.  Assuming you make enough that you can still meet the 90% threshold (85% this year), okay, but, if not, I’d rather make an interest-free loan to the government than pay the government interest.

 
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It's taken a while, but my wife's discretionary spending is driven by the checking account balance.  Can I make this purchase now?  I need to check available funding first.  So by going the pay $1K in Spring route we'll unintentionally spend more in the 12 or so months prior.  By taking the $1K refund instead prior spending is down then that money can be more easily allocated to a bigger project.

So while I understand the interest free loan to the gov't angle, humans aren't robots.  In our case I think we net ahead by taking the refund.  And I'm sure we're not alone.

 
Warrior said:
Anyone with an understanding of how this works would choose to receive the money now rather than later. If you disagree, you're turning down a 0% interest loan just to have someone else hold onto your money for a year.

With that said, I recognize that for some people there's emotional value in giving someone $, forgetting about it, and then being 'gifted' it back to you the following year. I don't agree with it, but I get it.
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Interest rates are so low who cares if it's an interest free loan?  On top of it $1,000 refund is like $20 per week.  90% plus of people with an extra $20 per week will just piss it away on crap and not actually save it.  While I agree it's dumb to get a huge refund in this example the lost interest is immaterial. 

 
It's kind of like taking installments over 20 years over a lump sum when winning the lotto. Sure it's "smarter" to take the lump sum but some people can't be trusted to do the "smart" thing. Just like those  people who should take installments should also take the refund.

 
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As long as I end up +/- $1000 each year then I consider it a success.  The interest lost if I am getting the refund is too minimal to be a concern.  I just don't want to have a huge discrepancy on either side. 

ETA:  I am not looking at the tax man as a savings account because I can budget my finances just fine on my own. 

 
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Pipes said:
On top of it $1,000 refund is like $20 per week.  90% plus of people with an extra $20 per week will just piss it away on crap and not actually save it.  While I agree it's dumb to get a huge refund in this example the lost interest is immaterial. 
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Actually, in this poll, we're talking closer to $40 ($38.46) per week because it's not a choice between $1000 refund and $0 refund/owed. We're comparing $1000 refund vs $1000 owed which is $2000/year. So, you technically can invest $2000/year. Yeah, interest in savings accounts are low and nothing to get excited about here even after doubling the money. But, you could put $1000 of that $2000 in a Roth and let the other $1000 sit in savings (earning almost nothing) to then pay IRS. Of course, this plan assumes you know exactly what you're tax bill will be and if you know that then you might as well work it out to be a $0 balance and still put that $1000 in your Roth.

 
dgreen said:
Actually, in this poll, we're talking closer to $40 ($38.46) per week because it's not a choice between $1000 refund and $0 refund/owed. We're comparing $1000 refund vs $1000 owed which is $2000/year. So, you technically can invest $2000/year. Yeah, interest in savings accounts are low and nothing to get excited about here even after doubling the money. But, you could put $1000 of that $2000 in a Roth and let the other $1000 sit in savings (earning almost nothing) to then pay IRS. Of course, this plan assumes you know exactly what you're tax bill will be and if you know that then you might as well work it out to be a $0 balance and still put that $1000 in your Roth.
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Sure I guess I missed that but you don't have that extra $2,000 at the beginning of the year so it's really June/July before you hit the first $1,000 then to turn around and pull those funds in April you're not missing out on much interest...assuming you socked that extra $40 away.  I still contend for the average person it's better to get a small refund rather that owe.  $1,000 is starting to get at the high end of a small refund but my point stands. 

 
Warrior said:
Anyone with an understanding of how this works would choose to receive the money now rather than later. If you disagree, you're turning down a 0% interest loan just to have someone else hold onto your money for a year.

With that said, I recognize that for some people there's emotional value in giving someone $, forgetting about it, and then being 'gifted' it back to you the following year. I don't agree with it, but I get it.
Click to expand...
This isn't the only "emotional" argument.  There's also something to be said for the certainty of knowing you don't need to budget for a possibly hefty one-time expenditure down the road. That certainty has a lot of value to most people.  If it didn't there wouldn't be an insurance industry.

 
How is this even a question?  I'm going to owe north of $20,000 and am happy to be able to get out of paying any sort of penalty for borrowing the government's money for over a year, interest free.  

 
I will take any and all refunders in here that want to give me weekly payments, any amount, and I will return all your payments in full at the end of 52 weeks.  It would be really awesome if a lot of people would do it and we repeat the process year after year. PM me. TIA.

 
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tonydead said:
I will take any and all refunders in here that want to give me weekly payments, any amount, and I will return all your payments in full at the end of 52 weeks.  It would be really awesome if a lot of people would do it and we repeat the process year after year. PM me. TIA.
Click to expand...
People obviously won’t do this and for good reason. And that good reason has absolutely nothing to do with giving you an interest free loan. 

 
MAC_32 said:
It's taken a while, but my wife's discretionary spending is driven by the checking account balance.  Can I make this purchase now?  I need to check available funding first.  So by going the pay $1K in Spring route we'll unintentionally spend more in the 12 or so months prior.  By taking the $1K refund instead prior spending is down then that money can be more easily allocated to a bigger project.

So while I understand the interest free loan to the gov't angle, humans aren't robots.  In our case I think we net ahead by taking the refund.  And I'm sure we're not alone.
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Posts like these make me happy that my wife doesn't know and doesn't really care what's in our accounts. She knows we can cover anything she wants, I know she doesn't want anything expensive.  

I'll give her a monthly "report" consisting basically just of the amount we invested that month, or once in a while how much more we spent than made due to projects. February was one of the few months with a negative spread, but that's because we did three home projects, paid for camps for the kids and paid for fall break vacation to the beach. 

It makes no difference to me if we owe money to the IRS. But I will keep our withholding as high as possible without having to go outside the system (system allows 10, I think you can request higher in person)

 
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Ignoramus said:
I love all the barons of finance touting the interest they're earning on that extra $85 per month that's not going to the government until tax time.

You guys are buying boats every year with all that extra interest you're earning, right?
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:goodposting:   Is this a thing these days?

ETA:  People understand the money flowing back and forth through the tax code isn't only about taxes, right?

 
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Ignoramus said:
I love all the barons of finance touting the interest they're earning on that extra $85 per month that's not going to the government until tax time.

You guys are buying boats every year with all that extra interest you're earning, right?
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Not every year, but, using your numbers over a 40 year working period investing at a return of 10% it comes out to about $50,000.  So yeah, one really nice boat when you retire.

 
tonydead said:
Not every year, but, using your numbers over a 40 year working period investing at a return of 10% it comes out to about $50,000.  So yeah, one really nice boat when you retire.
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Few things:

1) I've never seen long term gains modeled on 10%

2) The other individual is also getting $1k at the end of the year, so you'd need to model the difference based on an extra $85*(1.07/12) versus $1k*1.07.

The difference is really negligible over 40 years, not enough to lose a minute of sleep. Also, most people aren't that diligent about stashing the extra $85 a month and I'd bet the guy who just parks his refund check actually comes out ahead in 40 years. 

Regardless, at $1k, the conversation is pointless. 

 
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tonydead said:
Not every year, but, using your numbers over a 40 year working period investing at a return of 10% it comes out to about $50,000.  So yeah, one really nice boat when you retire.
Click to expand...
Where are you earning 10%?  If people know they have a tax bill coming due in April they certainly shouldn't be dumping that extra cash into the stock market...especially in today's climate.  Realistically 1 of 2 things happen with a vast majority of people that have an extra $40 per week.

1.  They piss it away on going out to dinner, or just buying crap they don't need

2.  Knowing they will owe a $1,000 in April they sock it into a savings account earning .25% interest so congrats they came out $15 ahead

Your scenario is fantasy land but I admire the effort.

 
tonydead said:
How is this even a question?  I'm going to owe north of $20,000 and am happy to be able to get out of paying any sort of penalty for borrowing the government's money for over a year, interest free.  
Click to expand...
That probably only works once, if you owe $20,000 two years in a row you would likely be paying a 6% underpayment penalty for 2019 unless your total tax liability is > $200,000

 
fantasycurse42 said:
Few things:

1) I've never seen long term gains modeled on 10%

2) The other individual is also getting $1k at the end of the year, so you'd need to model the difference based on an extra $85*(1.07/12) versus $1k*1.07.

The difference is really negligible over 40 years, not enough to lose a minute of sleep. Also, most people aren't that diligent about stashing the extra $85 a month and I'd bet the guy who just parks his refund check actually comes out ahead in 40 years. 

Regardless, at $1k, the conversation is pointless. 
Click to expand...
1 - use 8 or 9% if you want.

2- I did just model the difference in interest.

 
Pipes said:
Where are you earning 10%?  If people know they have a tax bill coming due in April they certainly shouldn't be dumping that extra cash into the stock market...especially in today's climate.  Realistically 1 of 2 things happen with a vast majority of people that have an extra $40 per week.

1.  They piss it away on going out to dinner, or just buying crap they don't need

2.  Knowing they will owe a $1,000 in April they sock it into a savings account earning .25% interest so congrats they came out $15 ahead

Your scenario is fantasy land but I admire the effort.
Click to expand...
My vote in the pole was based on what people should do.  That includes having a certain percentage of savings in a regular account that can be used to pay unexpected bills of $1000, let alone a known bill of $1000.  Even if it's only $15 you're telling me that people need to pay that as insurance for their behavior?

 
tonydead said:
1 - use 8 or 9% if you want.

2- I did just model the difference in interest.
Click to expand...
Models aren't built on 8-9%, it isn't realistic. The last decade has created this perception, but those monster YoY gains don't last forever. 

I ran the models just now (at 7%, which is a fair way (some might even say generous) to show returns. 

For compounding monthly (.0058333)

At year 5: $5,965.83

At year 10: $14,423.15

At year 20: $43,408.79

At year 30: $101,660.10

At year 40: $218.725.45

Mind you, for this example to work, your security A; has to be under $83.33 to purchase & B; $0 commission from broker.

I also looked at human error here, where if this person misses just one deposit a month, which I'd think is highly likely, their total at 40 years is $170,358.67.  

Model B is simple, 40 years at 7%

At year 5: $5,750.73 (so after the first 5 years, you netted an extra $215.10)

At year 10: $13816.44

At year 20: $40,995.49

At year 30: $94,460.78

At year 40: $199,635.11

The answer to the OP in reality is that it makes no difference. 

 
tonydead said:
Not every year, but, using your numbers over a 40 year working period investing at a return of 10% it comes out to about $50,000.  So yeah, one really nice boat when you retire.
Click to expand...
In this scenario it'd actually be a $100k+ difference over 40 years. Assuming their tax liability is 10k a year and the choice is to pay 11k in tax or 9k. One chooses to pay the extra 2k and the other invests it. 

Person A invests 166.67 per month and withdrawals 1k at year end to pay the remaining tax bill. Net contribution equals 1k.

Person B withholds an extra 166.67 per month and receives 1k back at year end and then invests that. 

At 7% difference of 26k

At 8% difference of 42k

At 9% difference of 68k

At 10% difference of 108k

But we all know this is a dream and the money would be wasted. 

 
Redwes25 said:
Why let the govt. get a no interest loan from me.  Prefer to owe something vs. a refund.  
Click to expand...
That is true but I would rather get a grand refund and buy something nice or put it toward a vacation.  A grand spread out over a year is only about 20 dollars a week that I would not notice and just piss away.

 
I have plenty of other diversified money.

   I'd rather know I'm getting the 1k every February.

Then send that to my life insurance for the year.  So I'll have 200 bucks at the end

 
Shoot_Me_Now said:
In this scenario it'd actually be a $100k+ difference over 40 years. Assuming their tax liability is 10k a year and the choice is to pay 11k in tax or 9k. One chooses to pay the extra 2k and the other invests it. 

Person A invests 166.67 per month and withdrawals 1k at year end to pay the remaining tax bill. Net contribution equals 1k.

Person B withholds an extra 166.67 per month and receives 1k back at year end and then invests that. 

At 7% difference of 26k

At 8% difference of 42k

At 9% difference of 68k

At 10% difference of 108k

But we all know this is a dream and the money would be wasted. 
Click to expand...
:lol:   The people are bad with money therefore they should make the wrong decision when it comes to tax withholding argument is the best.

 
fantasycurse42 said:
Models aren't built on 8-9%, it isn't realistic. The last decade has created this perception, but those monster YoY gains don't last forever. 

I ran the models just now (at 7%, which is a fair way (some might even say generous) to show returns. 

For compounding monthly (.0058333)

At year 5: $5,965.83

At year 10: $14,423.15

At year 20: $43,408.79

At year 30: $101,660.10

At year 40: $218.725.45

Mind you, for this example to work, your security A; has to be under $83.33 to purchase & B; $0 commission from broker.

I also looked at human error here, where if this person misses just one deposit a month, which I'd think is highly likely, their total at 40 years is $170,358.67.  

Model B is simple, 40 years at 7%

At year 5: $5,750.73 (so after the first 5 years, you netted an extra $215.10)

At year 10: $13816.44

At year 20: $40,995.49

At year 30: $94,460.78

At year 40: $199,635.11

The answer to the OP in reality is that it makes no difference. 
Click to expand...
Is inflation somewhere in this calculation?

 
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