Tax Refund vs. Owing the IRS
Tax season rolls around, and you either breathe a sigh of relief when you see a refund coming your way or groan as you realize you owe money. But what does it actually mean when you get a tax refund or have to pay the IRS? And more importantly, how can you plan better for next year? Let’s break it down.
Why Did I Get a Tax Refund?
A tax refund means you paid more in taxes throughout the year than you actually owed. This usually happens because:
✔️ You had too much withheld from your paycheck.
✔️ You qualified for tax credits or deductions that lowered your tax bill.
✔️ You made estimated tax payments that exceeded what you owed.
Why This Can Be Bad
You gave the government an interest-free loan – Instead of having that money in your paycheck throughout the year, you let the IRS hold onto it, only to get it back months later without any interest.
Why This Can Be Good
It’s a forced savings method – If you struggle to save, getting a lump sum refund can be a way to put money aside (as long as you use it wisely!).
What to Do for Next Year
If you prefer to have more money in your paycheck rather than waiting for a refund, consider adjusting your W-4 withholdings to better match what you actually owe. That way, you get to use your money throughout the year rather than waiting for tax season to get it back.
Why Did I Owe Taxes?
Owing taxes means you didn’t have enough withheld from your paycheck or underestimated your tax liability. This can happen because:
✔️ You didn’t withhold enough on your W-4.
✔️ You had additional income (freelance work, side gigs, rental income, etc.).
✔️ You lost or changed deductions that you had in previous years.
Why This Can Be Bad
Unexpected tax bills can be stressful – If you’re not prepared, owing a large tax bill can mess with your budget and even lead to penalties if you don’t pay on time.
Why This Can Be Good
You kept more of your money throughout the year – Instead of overpaying the IRS and waiting for a refund, you had more cash flow during the year to save, invest, or use as needed.
What to Do for Next Year
To avoid a surprise tax bill, adjust your withholdings or set aside money for taxes if you have additional income. If you’re self-employed or have side income, consider making quarterly estimated tax payments to stay on top of what you owe.
The Bottom Line
Neither getting a refund nor owing taxes is inherently good or bad—it all comes down to planning and making sure your money is working for you. If you prefer bigger paychecks throughout the year, tweak your withholdings. If you’d rather get a refund, make sure it’s intentional. The goal is to be in control of your money so tax season never catches you off guard!
Would love to hear—do you prefer getting a refund or keeping more of your money throughout the year?
