Should you pay in extra tax so you always receive a refund or pay in as little as possible so that you have access to the money for longer?
Time value of money says you should pay in as little as possible while practicality (and for many human nature) says you should make sure you always receive a refund.
The main thing with withholdings that people should watch out for is that there are penalties if you pay in too little throughout the year. For federal purposes, the general rule is that if your withholdings and refundable credits are 90% of the tax on your 2021 return or 100% of the tax on your 2020 return you won’t owe a penalty. If your AGI in 2020 was more than $150,000 (limit may be different depending on filing status), the general rule is withholdings and refundable credits need to be 90% of the tax on your 2021 return or 110% of the tax on your 2020 return. These are the general rules and you should review Form 2210 Instructions for your specific situation.
Some states/localities/etc. have penalties for tax underpayment that is much higher than the Federal penalty. Therefore, the guidelines for these other taxing authorities should be reviewed as well.
In most situations, the decision to receive a refund or owe tax is not material either way and therefore it is your preference. Personally, although I know I could earn a little bit by reducing my tax payments and paying it later when I file my return, I like knowing that it is already taken care of. Therefore, I pay in enough to make sure I receive some refund but try and get it close to the actual tax liability owed.
This is largely dependent on the dollar amount I realize, however, I am curious. Would you personally rather receive a refund or owe tax when you file your tax return?
Interesting Article(s) or Video(s)
Eternal Perspective Ministries - Giving Helps Us Take Our Eyes Off Ourselves and Join What God Is Doing in the World
A Wealth of Common Sense - Doing Nothing is Hard Work
Sometimes no action is the best approach even if it doesn't feel good.
Thank you for reading!