Why I Prefer to Owe Money to the IRS Every Year

You shouldn't be excited about getting a tax refund.

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; I end up having to send in a tax payment every year.

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. Here's why.

The big benefit of owing money to the IRS

I prefer to owe the IRS money rather than get a refund for one simple reason: I want to keep my cash for as long as possible rather than give an interest-free loan to the taxing 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.

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.

That money could also be used for financial emergencies or paying down debt

The money also isn't there for you if you really need it. If you have a financial emergency, those funds could potentially have been used to cover your costs. Unfortunately, the IRS won't send you back the money you prepaid early just because you need it. As a result, you could be forced to put expenses on a credit card to cover the emergency.

If you have debt you're paying off, sending in extra money to the IRS also means you won't have that cash to make extra payments on your debt during the year. Even if you use the lump sum tax refund you get to pay down your balance, you'll have missed out on the chance to save on interest since you'll have been making higher monthly payments the whole time.

There's little reason to incur the opportunity costs associated with overpaying your tax bill -- especially when it's easy to adjust your withholding with your employer to avoid having too much taken out. The best tax software can help you figure out what you'll owe and how much to have withheld.

While you want to make sure you pay in at least 90% of what you owe to avoid penalties, you definitely don't want to get a refund -- and if you owe a little bit each April as I do, then you'll have avoided giving the IRS any extra cash that could've been used during the year to improve your financial situation.