MLR

It’s your money – don’t lend it interest free to the IRS

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It’s the time of year when tax preparers run television commercials touting a larger refund if they prepare your taxes. To listen to these advertisers, you would think that a large tax refund is a good thing.

That’s not always the case.

In many cases, the only reason people get tax refunds is because they’ve paid more money to the government than they were required to pay. The refund is nothing more than the taxpayers’ own money, which the IRS has been holding for most of the past year. However, in some cases, refunds are due to refundable credits.

If the taxpayers had not given this extra money to the IRS to hold for them until they filed their tax returns, they could have invested the money. The IRS pays no interest, as long as it issues the refunds in a reasonable time after the taxpayers file their returns.

A better strategy is to control the amount of taxes you pay during the year through withholdings and/or quarterly estimated tax payments. Your goal should be to keep your refund to a minimum or even owe a little when you file your return. While paying too little during the year can result in a penalty, the IRS does not charge extra so long as the amount you owe when you file your return is less than 10 percent of your total tax.

It is your money. There is no point in giving it to the government any sooner than required.

Planning your affairs to pay less tax is a fine strategy. If it looks as if your refund for 2012 will be significant, consider reducing your withholding for 2013.