Why writing a check on April 15th is the best outcome
I still have not run my 2007 numbers through TaxCut, but I’m nearly certain I’ll end up owing a large sum of money to the feds and the Commonwealth of Massachusetts. I have no worries about getting hit with underpayment penalties because I did withhold 100% of my 2006 tax liability in 2007.
Let’s say I end of up owing $1500. While there’s probably more math to this than my rough estimate, that’s an average of $750 for 16 months at 0% interest. If I reinvest that $750 risk free at 5% (which was common in 2007) for 16 months, I’ll net $50 in interest. Sounds like a good deal to me, $50 free for doing nothing more than properly setting my withholdings. In the reverse case you are losing money, suppose you get a $1500 refund, that’s $1500 of your money you loaned to the government interest free, while the Treasury was paying savvy investors 5% interest for the same privilege. The opportunity cost of that money is even higher if you are making payments on a loan at a rate higher than 5%. Instead of paying the extra money to the government, you could have been making the payments to your loan and reducing the interest paid.
I find refund anticipation loans to be comical. You give an interest free loan to the government for a whole year and then pay sometimes 30% APR to get that money back a week or two earlier? Not smart. I don’t think we’ll ever see the government really crack down on this because it might actually result in people becoming educated about how taxes work. The more you know about taxes, the less you will like(tolerate) them, substantially reducing public support for tax increases in the future.
So remember when you file your taxes, if you aren’t writing a check there’s a good chance you should be revisiting your W-4 and changing your withholdings.
