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Why Owing Uncle Sam Made Me Smile

   Posted On: April 8, 2015  |    Posted In: Personal Finance 101  |     Posted by: Broke Millennial®

For all the things I adore about finance, which I assure you are many, I just can’t get hyped up for tax time. Maybe it’s the needing to sit still for about three hours while I file or the general anxiety that I’ll massively screw something up resulting in an audit. Or that I won’t screw anything up, and still have to prove everything to Uncle Sam’s boys at the IRS. But one thing occurred this season that resulted in a little smile – I owed money back to the government (both State and Federal).

[taken from Giphy]

Yes, I’m serious.

WHY I WANT TO OWE AT TAX TIME

For years I’d heard my Dad’s general grumblings about how getting excited about a tax return is shenanigans. You’re giving the government a free loan all year and then you’re supposed to get excited when Uncle Sam returns money that’s rightfully yours without interest?

[taken from Giphy]

This year I joined my Dad’s team. Instead of getting all excitable about a couple thousand bucks back from the IRS and New York State/City, I kept that money and invested it in the market so I could get some return on it before forking it over.

I’ve also started to owe more money to the IRS because my freelance income is steadily increasing. This is because taxes are taken out of contract gigs upfront and the amount I pay in taxes all year from my full-time job doesn’t eclipse what I owe on side hustle income (I do pay some taxes during the year, I just don’t “over pay” if you will). Yes, this means I have to start looking at quarterly estimated taxes in 2015, but that’s an entirely different topic.

Let’s get back on track and overview how I prepare for owing Uncle Sam money come tax time.

HOW I PREP FOR OWING UNCLE SAM

1. Collect all my documents – and hound a few clients for 1099s

Whether you plan to owe the IRS or have the government owe you, don’t start filing without first prepping all your paperwork. Here’s what I needed this year:

  • W2: I had two because I switched jobs in April
  • 1099: A handful from clients who hired my freelancing services
  • 1099-DIV: tax form on investments
  • 1099-SA: tax form for distributions taken from my HSA (health savings account)
  • 1099-R: tax form for 401(k) roll overs (even though I didn’t take a distribution)

I’ve never paid an accountant to handle my taxes and always use tax prep software.

2. Save 75 percent of my freelance income

Freelancing is income I make in addition to my day job salary. I don’t need any freelance income for my day-to-day living, so I elect to put 75 percent away in savings (much of which goes into investments) and 25 percent gets earmarked for my travel fund.

By saving 75 percent, I never stress about having available funds to pay off the taxes owed. Even when I need to start paying quarterly taxes I’ll be in good shape thanks to this strategy.

I know a lot of my peers see a tax refund as a great way to save or in their minds, be saving all year. I prefer to have the dedication to handle my savings and finances myself and not leave it in the hands of the government. Even if that means I owe $1,600 on April 15.

3. Max out a traditional IRA (for the tax break of course)

The IRS restricts how much you can put into an IRA when you have a company-sponsored retirement fund. In 2014 I made less than that threshold and was able to contribute to a 401(k) with a match and fully contribute to an IRA ($5,500).

While I’m a big fan of Roth accounts, I elected to max out my traditional IRA in 2013 and 2014 to take the tax break. This year, I anticipate I won’t be able to fully contribute to an IRA due to income restrictions, so I’ll put some towards traditional and the rest into Roth.

4. Invest in the stock market throughout the year

I’m all set on the emergency fund and don’t have any debt. Thanks to these two factors, I keep a significant amount of my money invested. I prefer to owe the government because I can make my money work for me all year and then cut Uncle Sam a check come tax time. Now, if you also share this mentality it’s important your money isn’t just sitting in savings, losing value to inflation, because then you might as well give the free loan to Uncle Sam.

TIME TO SWITCH YOUR MINDSET

It’s up to you, but I wouldn’t leave my money sitting in a 0.01% interest rate savings account at Bank of America, Chase, Wells Fargo or Citibank and I sure don’t plan to let Uncle Sam use it for free.

DISCLAIMER: This post originally ran as part of the TaxACT #BeatTheDeadline blog tour which shares tips on how to make tax time a smooth and easy process before the April 15 deadline. TaxACT provides the tools and guidance to help you confidently file taxes easy and fast. Do your own taxes today at TaxACT. You got this.

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22 responses to “Why Owing Uncle Sam Made Me Smile

  1. I completely agree! People always look at me like I’m crazy when I say that too. I was really annoyed that I messed up this year and got money back at tax time.

  2. I’ve just started making enough freelance income for it to be worth the government’s time so I’m wondering what taxes will be like this year. Like you, I’m not a big believer in not giving the government more money than I have to but this is the first year it will really matter. I was thinking of estimating a quarterly amount but I haven’t done that yet. :-/
    It requires a little more discipline to save like this but works out better in the long run. 🙂

    1. I didn’t make enough in Q1 to justify the time it would take to file quarterly, but I likely will moving forward. I do know freelancers who take the penalty hit at the end of the year because they don’t want to deal with quarterly taxes.

  3. I get what your dad is saying and he’s right. I wasn’t happy about my tax return amount this year for it was a lot less, but realize from your dad reasoning that it is for the best.

    I know what most blogs are saying about preparing for retirement but the truth is a lot of people don’t start saving until later on in life which is not good. Making retirement a priority has at this point is not only an important decision, but a major sacrifice.

    1. I’m fortunate to not be dealing with debt, which enables me to throw a lot towards retirement. It is a huge struggle to be handling debt and trying to save for the now AND the future. I just hope anyone with a company-matched retirement account at least utilizes it up to the match.

  4. Couldn’t agree more! In fact, I even wrote a very similar article, haha. I’m guilty of getting a refund again this year. Mostly, I was just too lazy to fill out the paper work to reduce my tax deductions on my pay cheque. I also just didn’t think I’d be getting back this big of a refund (~$2500).

    1. That’s a pretty big chunk of change. I just changed my deductions today so that I would be paying some to the City of New York (I apparently didn’t last year) and I don’t want to get hit with a penalty!

    1. The interest-free loan is really what gets me upset! In Switzerland the government pays interest back on tax refunds!

  5. #2 is great, saving 75% and 25% for travel, this also gives you the Emergency Fund of the IRS, great moves all around. I do something similar with my side hustle, currently it acts as a debt repayment accelerator, but it has some room for what I call my “man fund”.

    1. Haha a “Man Fund.” Love it. If I had debt it would all be going there (with the exception of saving for taxes). I’ve started to also invest most of the 75% that gets saved, but keep enough liquid for when Uncle Sam comes calling.

  6. I’ve always enjoyed getting money back at tax time, mainly because it feels better to get money than to owe it. But it makes no logical sense to try to get a refund so I adjusted my withholding and will look to break even for next year. It will be nice to have a little more money every month I can put towards student loans.

    1. It’s certainly a nice feeling to get money back instead of owing, but in the bigger picture scheme I like the implications of owing.

  7. I was annoyed this year because we got a sizable refund. I can handle maybe $100-300. Usually it’s around $200. But a total of $950 from the state and federal? Sheesh.

    That said, I’m paranoid about underpaying. So I shoot for what I consider to be the safe zone: definitely enough, but less than $300.

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