To Refund or Not Refund; THAT is the Question!

I just had a conversation with a client about their income tax withholding. They owed approximately $1,000 and asked what they should change.

My response is this:

Using the US Treasury as a savings account is a very bad financial plan. It's better to have use of your money throughout the year - you aren't earning a penny on the money the you get refunded, but you may be saving interest costs by paying down a credit card or your mortgage. You can earn by investing that money. If you have direct deposit, have your employer deposit part directly into a savings or investment account (an investment account may prevent you from dipping into it for impulse expenditures). I'd prefer to see you owe up to $1000 rather than have a refund - as long as you are able to set aside those funds to pay your liability. YOU get to use the $1,000 that you may owe without any penalty from the IRS. Time to turn those tables!