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One of my favorite posts on this website recalls the time when I finally paid off my mortgage and finally became debt-free and owned, “Every Blade of Grass.”
What made me especially proud of this moment was that it was just four years removed from me being at my lowest place in life, emotionally and financially.
From that rubble, I picked myself up and charted a new course that took me to the financial and emotional highs that I am currently at.
Rapidly paying off debt, one after the other, was truly gratifying and created a new mindset for me, one that was highly debt averse.
So it might come as a shock that this post is actually a celebration of me finding out that I am indeed in debt again.
What gives?
Well, unlike most people this time of year who celebrate the fact that they are getting a refund from the IRS, I actually am pleased I owe Uncle Sam some serious coin.
Granted although receiving money is typically a good thing, I feel one of the few exceptions is related to the IRS refund check.
Some people view the tax refund check as “bonus money,” and often use this windfall for ill-advised splurges.
But if you analyze the reason why you are getting the refund in the first place you will come to realize that it is essentially your hard-earned money just being returned back to you.
You basically just sent the government too much money in the first place, having overpaid your taxes.
This refund money, unlike my favorite kind of money, was completely lazy.
It did not work tirelessly for you to earn even more money.
No, this IRS refund money did not contribute at all to the “Capital Snowball,” phenomenon.
Instead this “money bum” just took an entire year off to chill at the beach while you slaved away at your 9 to 5.
In the worst case scenario you might be considered even more financially behind than when you started.
Although the average household tax refund hovers around $3k, it is not uncommon for high income individuals, such as physicians, to see even greater refund amounts.
Before I knew how the game was played, I was thrilled at getting IRS refund checks of $10k or more (which sadly happened on more than one occasion).
I essentially was giving Uncle Sam a 5 figure interest free loan over the course of a year.
Even worse was that, during this time, I was still in debt and paying interest on my own loans.
The whole situation was absolutely comical.
Here I was borrowing money and paying someone interest for it and then immediately turning around and lending that money for free to a 3rd party which, in this case, was good ol’ Uncle Sam.
I remember during this time that some of my student loan interest rates approached the 9.5% range.
By overpaying my taxes by $10k instead of channeling that money to pay off this loan, for example, I garnered an extra $950 in interest charges (granted technically the true amount would have been less as the excess payment to the IRS was spread out over 12 months).
This brings me full circle to my post title of why I am actually happy to find out I am in debt.
You see, after I learned how the game was played, I decided that turnabout was fair play.
By preparing my taxes and finding out that I have underpaid my share, I have beaten Uncle Sam at his own game.
Even though I have 0 tax exemption status listed at my W2 job (have the maximum amount for taxes withheld), because I have created multiple passive income streams, I now find myself owing Uncle Sam in the low 5 figure range.
[I had originally written this post prior to receiving my K-1 statements from my real estate syndication investments.
Prior to receiving these K-1s my Tax Software (H&R Block) had me owing the IRS a little over $13.4k.
After finally receiving the K-1s (last week of March), inputting this data into my tax software revealed a pleasant surprise and highlights the beauty of favorable tax code laws in the treatment of real estate investments:
Although I received over $20k in distributions from my 37th Parallel Property investments, because of favorable tax codes allowing depreciation, I was able to reduce what I owed to $6600 (saving me $6.8k).]
It is now Uncle Sam that has in essence given me an interest free loan over the year.
With smart investments I could parlay that into an extra $1k or so.
Sure it is not an earth shattering amount but it sure does beat the alternative.
This scenario not only eliminates that lazy “beach bum” money of the past and puts him right to work, but in the process convinces even more of his friends to join and work for me for free.
Just call me your modern day Tom Sawyer of finance.
Of course when you play this game with the government you want to make sure you are aware of all the rules so that you do not get hit with penalties which could derail this plan completely.
The IRS can, and does, penalize you if they find you have severely underpaid your taxes through the year.
There are certain thresholds in place that will trigger these penalties and it is up to you to be cognizant of them so that you do not set them off.
Please check with current guidelines as this can change from tax year to tax year but some of the following rules to avoid underpayment penalties have stood the test of time:
- You owe the IRS less than $1k
- You paid at least 90% of your total tax amount due OR 100% (110% if classified as a high earner) of the previous years tax amount (whichever amount is smaller).
- For 2018 there is a one time exception where you can underpay by 15% rather than the 10% before penalties are triggered (this took into consideration the confusion created by the new tax code changes)
Due to the amount of federal income tax I pay each year, I have quite a considerable buffer before any threshold applies to me (based on 10% underpayment threshold I would have to owe almost $30k before being penalized)
I do envision sometime in the future that my current tax withholding will not be enough as my side income streams hopefully continue to grow and bring with them higher tax implications.
I can then choose one of two available options:
- Make quarterly payments to the IRS on my estimated taxes OR
- Fill out a W-4 form and designating an even higher withhold amount (but ideally still owing taxes but below the underpayment threshold amount).
The second option sounds more appealing to me and likely the one I go with.
So there you have my rationale for being happy finding out I am in debt.
Don’t worry my debt averse nature is about to kick in and, with the exception of next year’s tax return, I will soon reclaim my debt-free designation.
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-Xrayvsn
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I’ve underpaid for as long as I can remember, probably since I was in my twenties. If I added up all the money I’ve made because my hard-earned bucks were invested during the year instead of loaned to Uncle Sam it is a substantial number. People don’t understand that
It is something that the majority of us fall trap too. It feels nice to get a refund because it is like “found money” but it really is your money being returned to you.
I totally miscalculated this year and got like 30k back. I think.its because I changed location and job and I was also able to leverage my side hustles. That was a bummer. It is important to understand the tax code and understand that you messed up if you get a significant return back.
I am glad you were able to decrease the amount owed. Your post are always engaging. Love it.
Yikes! That is quite a bit of refund you have there. Although it is nice to receive a big check like that, knowing what it truly represented puts a bit of a downer on it.
Yeah I was absolutely stoked about how my investments actually lowered my tax bill by that much. I received a little over 20k in real estate distributions from that one syndication AND lowered my tax bill by 7k. So really it was like a $27k+ cash swing in my favor which I will take any day 🙂 Glad you liked the post 🙂
Thanks for sharing. I’ve filed an extension this year, because one of my K1s only came through last week. I did my first two syndications in 2018 so this is the first time I’ve had K1s as part of my return. I’m hoping for a pleasant surprise just like you got but I have no idea what to expect.
Sorry about needing the extension. That’s the one pain about real estate investments I have. You should generate decent reduction for taxes for awhile (mine are likely going to decrease my tax costs for around a decade or so)
I got my final documents last week also, but I was still able to file. Why couldn’t you? Monday is April 15.
It isn’t so bad to file in October though. I have to do that some years when a K-1 comes in August or something ridiculous.
I have used H&R Block software to prepare my taxes the past two years. Knowing that the K-1s come in late, I had everything else already done with just the K-1 data needed. So when I got the K-1s in (last one was a little over a wk before deadline), it was pretty easy just to finish the return and not need an extension.
I underpay during the year a lot every year. Some years I may do that too much since I have to pay a few hundred dollars in penalties for not paying quarterly or withholding enough. Still, this was a good tax year for me. The total bill was lower and my tax rate was 19%. I can’t complain too much when I get to keep 80% of what I make. Still, I don’t want to give them any interest-free loans. It amazes me how many people think they pay their taxes in April and not with every paycheck. I explain… Read more »
Wow. 19% tax rate is absolutely outstanding. I calculated my overall tax bite and all in it came to 31%.
Very true that if it was given as an annual bill the amount would be so much that people would faint (and in typical fashion most people would not have set aside enough money to pay it).
I understand the concept of obtaining an interest free loan from the Federal Government versus having paid them too much taxes during the year and in essence providing Uncle Sam with an interest free loan.
However, I have received refunds from the IRS certain years and have paid the IRS additional taxes come 4/15 in other years. Psychologically speaking, I can say that receiving a refund from the IRS feels significantly better than writing them out a check come tax time.
I hear you on the psychology for sure. It is much nicer I receive ‘unexpected money’ than to owe it.
But if you truly want to game the system the math behind it tilts towards the owing uncle Sam scenario as the best way to come out ahead
Loved this post! You are so right about it being better to not get a refund and not loan our money for free to the IRS every year. My husband and I have found this out ourselves over the years and after meeting with a tax professional we were able to get our withholdings corrected so that we are not doing this every year.
Thanks Andrea! Yes, it is easy to get caught up in getting a big IRS refund because who doesn’t like money? But when you figure out it was yours to begin with it loses its charm. Have a great Easter and rest of the weekend 🙂
OK I’d bookmarked this one to wait and read when I had time. Hehe, tricky title!
We received back what I’d consider wayyyyyy too much for our taxes this year. It’s all good, though, we put a triple amount down for student loans last month (!!!). Still, adjusting big time for next year!
LOL. Yeah it was sneaky title to throw in there but I couldn’t help myself 🙂
Congrats on aggressively attacking your student loans. This year was tricky since no one really knew how the new tax codes would really effect them so getting a return this year is understandable. I have been owing Uncle Sam quite a bit for the past several years (and happy about it) after I figured out the true game
Owe big or go home!
Lol. True. This is the one time it pays to owe.
Recently I’ve actually discovered a benefit to being owed money by the government. Paper I bond space. The only way you can buy ibonds without using treasury direct, up to 5k, is with a tax return.
That’s an interesting tidbit and one I wasn’t aware of. Thanks for the tip
You would have made a great engineer, X, as well as a great doc, you have a real bent toward logic and you have a great feel for integrating math with life. As an engineer I appreciate people that can balance math with behavior, because in real life it seems most problems have both sides to them. Engineers like me tend to pretend life is only math, ignoring how much emotions control our own decision making. Nice post!
Thank you for the wonderful comment. I think I am logical in my approach to most things in life. It is tricky to balance street smarts with book smarts but I try my best.
Emotions definitely impact decisions for better or worse.
Man, I gotta figure out a way to do my taxes so that I end up owing money to the government. There hasn’t been a single year where I owed money so have to figure it out!
They usually taxed a very big chunk of my bonus so I really couldn’t do anything about it. This year, my income is not as bonus heavy so.. who knows.
In the past I was happy to get a tax refund until I realized what it meant. Now I try to turn the tables and hand the government give me an interest free loan. Last year was my best trick ever where I got a “6 figure 0% loan from the government for over 12 months:
https://xrayvsn.com/gaming-the-tax-code-my-145k-interest-free-loan/