I ran across this article on MSN Money on six ways to get your tax refund. The fifth way, “IRS Credit,” left me scratching my head a bit:
If you got a refund but don't need the cash right away, the IRS will hold on to it for you and let you apply it to next year's tax return. “It's called a credit elect,” [About.com author and tax professional William] Perez says. “It's great for people who are self-employed.”
Getting any refund at all is a bit of a loss, because it means that too much in taxes was paid throughout the previous year either through employer withholding or through estimated tax payments. The government doesn't require that you give them more throughout the tax year than what you actually end up owing, but unless you tell your employer otherwise, they will probably over-withhold as a default. (The amount that is withheld can be adjusted by filling out IRS Form W-4.) Any money that you get as a refund after filing your tax return is money that you lent to the government, interest-free.
So, I don't understand why it's even a good idea, let alone a “great” idea, to let the government hold onto the money for another year on top of that. For self-employed people, or for anyone else.
I can't think of any good reasons to do this. Doing so constrains the amount of your refund to serving one purpose only: reducing next year's tax bill. Why not at least get the money now, use it for what you want, and let next year's tax bill worry about itself? If there's a concern that there won't be enough money for taxes next year, then put the money in a savings account. At least it will earn interest, and in the case that you do have enough to cover taxes, you can use the money for something else.
This seems to be a bit like making mortgage payments in advance. (This is different than making extra principal payments, which reduces the amount you pay in interest over the life of the mortgage.) There's no savings, but you're out the money nonetheless. The bank just holds it and applies the amount when it's due. Why bother?
About the only reason I see that this might be good is if there's an overspending issue, but it seems like there are more effective ways to tackle an overspending issue than to deprive yourself of a refund.
Am I missing something? Maybe a self-employed person or an accountant can weigh in on the issue and enlighten me. 🙂