I Have a Huge Tax Bill This Year. Here’s Why I’m Glad

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My accountant has told me I’m going to owe several thousand dollars when I submit my tax forms to the IRS. Read on to learn why this is great news. [[{“value”:”

The average tax refund in 2023 was $2,903 according to The Motley Fool Ascent’s tax research. Many people get a refund, and it’s common for people to actually look forward to tax season because of it.

I rarely get a refund, though. And in fact, my accountant has already informed me that when I do my taxes this year, I am going to have a big bill and owe several thousand dollars.

While it may seem as if it would be upsetting to owe money rather than get it back, I’m actually really happy that I owe a lot. Here’s why.

I’ll owe money because my income is higher

One of the reasons why my tax bill is going to be a few thousand dollars is because my income went up in 2023.

As a freelancer, I have to pay estimated taxes during the year. Most people get money withheld from their paychecks, but that doesn’t happen for me. To avoid potential underpayment penalties freelancers like me either need to pay 90% of the tax owed for the current year or either 100% or 110% of the tax owed for the prior year (with the specific percent depending on income).

Since it’s hard for me to anticipate how much tax I’ll owe for the upcoming year due to the fact my income is irregular, I opt for paying based on the prior year’s bill. This means that, since my income went up, I underpaid. If my income had gone down, it would mean I’d overpaid and was getting a refund. But, I’d rather earn more than earn less just to get a little bit extra in taxes.

If your income goes up during the year, if you’re a freelancer and you take the same approach I do and pay taxes based on last year’s earnings, you should plan for a bigger tax bill and save during the year for it. Tax software can give you an estimate of what you’ll owe based on your income.

If your employer withholds a percentage of pay, then this shouldn’t be as big of an issue for you — unless you happen to earn a higher income from some outside source your employer doesn’t know about. In that case, it may not withhold enough to account for the fact you end up in a higher tax bracket.

If you do happen to earn extra income outside your job, let your employer know this if you don’t want a big tax bill, so it can adjust accordingly. Or you can just plan for that bigger bill and save for it, if you’re like me and would rather not get a refund.

I didn’t give the IRS an interest-free loan of my money

There’s another reason why I’m happy I’ll have a big tax bill. It means I didn’t give the IRS the free use of my money, essentially providing them with an interest-free loan. A refund would just be a return of my own money that I hadn’t had access to all year, because of overpaying my taxes.

I’d rather not give up my funds for months at a time for no reason, missing out on the chance to keep the money in a savings account to earn interest or to have it available in case of emergencies.

If you are getting a big refund, you may want to consider adjusting your withholding next year so that doesn’t happen. That way, you can use your money during the year instead of waiting for the IRS to give it back to you at the end.

The IRS has a withholding estimator online you can use to figure out how much you should have withheld. Use it to make sure you avoid penalties for underpaying without sending in extra money for no reason. After all, you have better things to do with that hard-earned cash.

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