Tax Day in the U.S. has now come and gone, which means by now you know how much you owe, or how much you will be refunded, for the 2024 tax year.
For most households, the sweet spot is not to owe – or be owed – a large amount. What classifies as large really depends on income. For an individual making $50,000, being short $1,000 on taxes would be a bigger constraint than it would for a household making $250,000. Owe too much, and you risk being unable to come up with the money all at once.
In the table below, I have assigned what I believe to be the ideal range based on income. You’ll find that these figures are 2-3% of pay. This table assumes a moderate level of personal planning, and it also assumes that your income is predictable from year-to-year. If you are deeply in debt, don’t have much savings, or own a business, this resource may not be as instructive.
| Income | Max you should owe | Max you should be refunded |
| $50,000 | $1,000 | $1,500 |
| $100,000 | $2,500 | $3,000 |
| $250,000 | $5,000 | $6,000 |
These numbers can be adjusted based on your level of planning and personal preferences. You may want to play it safer by having more withheld from your taxes each paycheck to avoid coughing up a bunch of money at tax time. This can be a useful “forced savings” strategy.
On the other hand, why shouldn’t you seek to maximize your refund amount? For one thing, the government does not pay interest to you on the money that you are refunded. Effectively, you have loaned the government money for free. Additionally, once you account for inflation and opportunity cost (that money could have been growing in a high-yield savings or investment account), the rate of return on your refunded money is actually negative. The higher your income, the greater the opportunity cost.
Most people hate the idea of losing money more than they like making it, and might feel like they need to avoid owing money when they file at all costs. Whether your tax dollars come out during the year, or in the filing period the following spring, they are going to come out. Avoid withholding too much or too little and aim to be as close to your expected tax bill as possible.
You can update your tax withholding by making changes to your W4 with your employer. If you and a spouse both work, or you have multiple jobs, you will want to consult IRS guidelines.
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