How To Manage A Loan From The Government

One of the worst feelings in the world is going to the mailbox and discovering a notice from the IRS in there. Our taxes are pretty simple, but nonetheless, we still have to fill out many forms and one can easily make a mistake that can end up costing you big time. We both have college degrees, one in engineering and one in business, and so we should be able to do our own tax returns. It really shouldn't be that hard.

We received two of the dreaded IRS notices this past spring. Luckily these were not demands for additional money or threats of audits, but advance warning that the IRS was going to be sending US checks. Apparently we were eligible for advanced child tax credits because our son is still under 18 and we applied for it last year.

This all sounds great, until you realize that when we apply the child tax credit on our income tax return, it really just lowers the amount of taxes we owe at the end of the year. What is really happening is that the government is sending us money to hold on to for a while until it asks for it back next April 15th. In fact, what this amounts to is a short term loan from IRS to us. That's still somewhat generous, but what to do with this loan until they ask for it back and more.

Well the checks started rolling in and we needed to decide how we could best make use of them in the short term. The answer was put them back into the economy through investment so the private sector could put it to the best use. Now that's not a sure thing. Investments don't always generate returns and its possible to end up with less than you started, but despite all of the upheaval of 2021, our economy and business in general has been doing remarkably well. We invested in a broad based S&P 500 index fund, and every time a check came in we added that to our investment.

As of 12/31, having invested a total of $1000 over the previous six months, our investment is now at $1,058.54. The increase of $58.54 is a combination of capital gains and reinvested dividends over that same period. When tax time comes, we can now have a little extra to hand back to Uncle Sam although he'll claim a chunk of the appreciated returns himself in the process. That's a bit ironic and a little maddening.

There's still nearly four months to go before tax return time, so of course anything can happen between now and then. Nonetheless, this was a good exercise in how to look at windfall money and looking ahead at what it costs us in the long run. Like they say, there's no such thing as a free lunch.