Tuesday, April 1, 2008

Making Money from my unpaid IRS Taxes

Hank over at My Investing Blog is running a Holiday Handout offering several prizes. One of the many ways to enter the giveaway is to write a blog response to Hank’s Holiday Handout Question. The question and my response follows.

How will you spend/save your 2007 tax return? If you aren’t getting one, how much do you owe?
I am not getting a return, and I will be writing a check to the IRS for $9746.00. That’s no small amount! You may wonder how on earth did that happen. Well, the IRS has a rule that you only have to pay in as much as you paid for the previous year. So, at the beginning of 2007, I calculated what that amount needed to be and adjusted my W4 accordingly. Then three things happened that drove my income higher. From the start of the year until the Fall, I was racking up overtime and early on in February, I earned a substantial raise. It wasn't long before I realized that if I continued to pay federal taxes at the same rate, I would far exceed my 2006 tax amount. That is when I modified my W4 to hold back a lot less. And finally, the third thing that impacted my taxes was that I received a large amount of capital gains and dividends from my investments.

I actually planned this and as painful as it is to write that check, I would just as soon add to that pain and write a check for my entire IRS bill at the end of the year. By holding back the $9746, I was able to make a little money off of my unpaid IRS tax money throughout the year.

To find out just how much, I did a quick check on the rate of return for my investments in 2007. I found that my portfolio managed to garner 12% growth last year. Not too bad, especially compared to 2008. Now, if we assume that I held back $187 a week (9746/52) from the IRS and the 12% growth was linear for the year (big assumption) I can calculate approximately how much money was skimmed off the IRS’s money.

Don’t you just love the sound of that? It turns out that I pocketed somewhere in the neighborhood of $554. That sure beats giving the IRS an interest free loan and it does take a little bit of the sting out of writing that big check.

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