To Owe, Break Even, or Get a Refund: Which is the Best Tax Strategy?

For many taxpayers, there is a singular reason to celebrate tax season, which opened in January for the 2023 filing season. This is when the Internal Revenue Service (IRS) starts accepting and processing 2022 tax year returns. But why do people celebrate tax season? Well, for the 2022 tax filing season, the IRS issued a total of $293 billion in refunds, with an average direct deposit refund of $3,039.

Every year, millions of taxpayers rejoice at discovering they’re receiving a tax refund as if it is free money. But the truth of the matter is that a tax refund is the result of your overpaying your taxes. While this can be done purposefully as a part of your overall tax planning strategy, it’s often the result of overestimating your tax burden and having too much withheld from your income each paycheck.

Experts make different arguments about which is the best strategy: owing versus getting a refund versus aiming to break even. So how do you know what’s best for your household? We’ll help you determine the answer — and simplify this whole dilemma once and for all.

When owing taxes is the best tax strategy

You punched in the information from your W2s or 1099s and the estimation at the top of the screen spits out the result: you owe taxes to the IRS. If you weren’t expecting this, it can turn your stomach.

Underestimating your tax burden and not having enough money withheld from your paycheck will cause you to owe the IRS. Nobody likes to owe taxes, but sometimes it actually is the best tax strategy.

“In most cases it’s better to owe than to receive a refund,” says Enrolled Agent Steven J. Weil, Ph.D. and president and tax manager of RMS Accounting in Fort Lauderdale, Florida. “When one gets a refund, in most cases what they are getting is nothing more than their own money back, which the government has held and had the use of interest-free.”

In other words, would you rather have more money at your disposal throughout the year to do with as you please or give Uncle Sam a loan without you earning any interest in return? That extra money could be used for things like helping with day-to-day living expenses, funding a retirement account, or saving for whatever matters to you.

This raises the question then: how much is it okay to owe? The U.S. income tax system is a pay-as-you-go tax system, so you must pay income tax as you earn income throughout the year. Employers are required by law to withhold employment taxes from their employees. If you work side jobs and you don’t pay enough tax through your day job, you may have to also pay estimated taxes throughout the year. People who are self-employed typically pay their taxes this way. Withholding too little in taxes — usually if you owe more than $1,000 in tax — can result in a tax penalty.

“If you owe too much, you might just have a penalty for failure to pay estimated taxes. The rules require us to pay, in equal quarterly payments or through withholding, an amount equal to the lesser of 100% of our tax liability in the prior year, or 90% of our tax liability for the current year,” says Weil.

That said, as long as you’re in compliance, using a legal tax strategy, and avoiding tax penalties, owing can be a financially sound strategy.

Who this tax strategy is best for:

If you can make the money work for you and keep track of what you will owe, planning to owe taxes may be a good strategy. Peter J. Greco, CPA, and founder and Chief Tax Strategist at CSI Group, says owing taxes is the best strategy if you have enough to cover the tax bill when it comes due.

“This strategy is best for those people that have substantial cash flow during the year, are able to save enough throughout the year and have enough money saved to cut a check to the IRS when the taxes are due,” Greco says. “The idea is that as long as you will not pay a penalty for underpaying your taxes, you should owe and make the money work for you.”

When breaking even on taxes is the best tax strategy

Paying taxes is something we all have to do, but there’s a middle ground between overpaying and paying too little: A tax strategy that results in getting as close to breaking even as possible. While you probably won’t hit zero, breaking even shouldn’t result in owing or receiving a substantial amount of money either.

Planning your taxes properly so you get as close as possible to breaking even might be the best of both worlds. You pay only what you’re obligated to pay throughout the year, and your take-home pay is maximized. This allows you to have plenty of control over your money, all while ensuring you’re meeting your tax obligation and avoiding underpayment penalties.

“The best strategy is breaking even, owing the IRS an amount you can easily pay, or getting a small refund,” says Clare J. Fazackerley, CPA, CFP. “You don’t want to owe more than $1,000 because you’ll have an underpayment penalty of 5% interest, which is more than you can make investing the money. Owing IRS more than you can easily pay results in extended payment agreements with interest and penalties.”

Having the precise amount withheld with the goal of owing or receiving as little as possible can mean incorporating routine check-ups throughout the year to ensure you’re on track. This can be something as simple as using the tax withholding calculator provided by the IRS to make sure your withholdings are aligned with the goal you set. That way, when it comes to file your taxes, you aren’t surprised with a bill you can’t easily pay.

Who this tax strategy is best for:

Breaking even can be a good strategy for most people. Especially those who want to be definitive about what money is truly theirs throughout the year.

According to Tim Yoder, CPA, a staff writer at Fit Small Business, “Most taxpayers should try to break even so that they can continue earning interest on their money, while still avoiding underpayment penalties.”

When getting a tax refund is the best tax strategy

The IRS will not try to stop you from giving it an interest-free loan, which is essentially what happens when they hold your money all year if you have too much withheld from your paychecks. This is money that could have otherwise gone toward your day-to-day expenses, savings, or larger contributions to a retirement account.

However, setting up your taxes so you receive a refund can be a suitable strategy if you struggle to put money aside each payday to reach your financial goals. If your take-home pay is adequate enough to cover your day-to-day living expenses and you’re okay with the government holding your money without paying you any interest on it, it’s an option worth considering.

“Getting a tax refund may be best for those that have problems saving money on a regular basis,” Greco says. “...If you don’t have it, you won’t spend it. It is basically a forced savings account.”

If your tax strategy consists of you deliberately overpaying as a way to save money, don’t throw your financial sense out the window when your refund arrives. Instead of frivolously spending the money, consider smart money moves you can make with your tax refund that will better your financial situation.

Who this tax strategy is best for:

If your tax refund is anything like the average of $3,039 for the 2022 tax filing season, that’s quite a bit of money. It can be enticing to spend it on things you want, rather than things you need. Squandering this money, money that isn’t free and is just your money being returned to you, won’t help your situation.

Proper money management doesn’t come easy. It takes a plan and discipline, something many people struggle with. Purposefully overpaying your taxes so you get a refund each year can be a strategy if you know you would have spent the extra money had you been given it. Although you won’t earn interest on this money while the IRS holds it, it’s money you can generally count on receiving as long as you plan properly.

Bottom line

Your individual taxes will have individual answers, so there may be no “best” strategy for everybody. But hopefully this info allows you to start planning ahead and not having your tax season be a surprise. By educating yourself about how taxes work, you can avoid making common tax mistakes.

If you aren’t sure which strategy is best for you or how to properly incorporate one of these strategies, consider speaking with a tax expert. That way, whether it’s owing, breaking even, or getting a refund, your tax strategy is aligned with your goals and financial situation. Alternatively, you could shop around for the best tax software to help you figure out how much you should be paying in taxes each year. This, in turn, will help you to better understand how to manage your money.