Why the ‘You Just Gave Uncle Sam an Interest-Free Loan” Argument Doesn’t Work For Many People

Executive Summary

Every year at tax time, you see pundits talk about ‘giving Uncle Sam an interest-free loan.’  While the concept of lowering tax withholdings is sound, there are several problems with its practice.  In this article, we’ll discuss:

  • The ‘common’ wisdom behind this interest-free loan concept
  • The major problems with its practical application
  • Situations in which this is actually wrong

The Concept of ‘Uncle Sam’s Interest-Free Loan’

What is a ‘interest-free loan?’  In order to answer this question, we need to look at how we pay taxes.

Most people work for an employer as W-2 employees.  Throughout the year, our employer is responsible for withholding some of our compensation to pay estimated taxes.  The employer is then responsible for remitting them to the Internal Revenue Service (IRS) on our behalf.

Every year, (no later than January 31 of the following year), employers must issue a Form W-2 to each employee.  This form reports the same information to both the IRS and the taxpayer.  Included in this information is the amount of taxable income the company paid, as well as the amount of money withheld for taxes.  The employee then uses this information (as well as information from other sources) as the basis for their tax return.  The tax return helps to calculate your tax liability (your actual tax bill) and compares it to what you’ve already paid.  The difference is your tax refund (if you’ve paid more than your tax liability) or a bill on taxes you may still owe.

Your refund is simply a return of some of the money collected over the course of the year.  Since the IRS does not pay interest on your refund, you could view this as an interest-free loan.

The Proposed Solution to ‘Uncle Sam’s Interest-Free Loan’ and its Challenges

Now that we have a better understanding  of the interest-free loan concept, the answer seems pretty clear:

If we reduce the amount of money we pay the U.S. Government during the course of the year, we can reduce the amount of our interest-free loan.

What’s Wrong With this Solution?

While everyone might want to hold on to as much money as possible, there are a couple of problems with doing so.  Let’s take a look:

Challenge #1:  We have little control over how much our employer withholds for tax purposes.

Employers are responsible for withholding taxes.  To help employers withhold the right amount, the IRS prescribes guidance.  This guidance, in the form of withholding tables, that state exactly how much the employer should withhold and remit to the IRS.  The only lever that an employee has is by declaring the number of dependents they have in their Form W-4.

Form W-4 is the form that each employee uses to inform the IRS about how many dependents they support.  The employer uses the number of dependents annotated in the employee’s Form W-4 to determine withholdings from the IRS tax tables.  As a rule of thumb, the higher the number of dependents, the lower the monthly withholding figure.  Of course, you cannot claim more dependents than you actually have (including yourself). Assuming your W-4 lists the maximum number of dependents you are legally allowed to claim, you have done everything you can to minimize your withholdings.

In essence, IRS guidelines force you (through your employer) to give Uncle Sam that interest-free loan more often than not.

Challenge #2:  Tax withholdings only address one side of the equation.

When you look at the tax liability equation, there are many calculations that go into figuring out your tax bill.  Withholding from your employee wages is just one part of this.  Depending on what’s going on in your life, there are:

  • Income from other sources
  • Adjustments to calculate Adjusted Gross Income (AGI)
  • Adjustments to AGI
  • Deductions
  • Exemptions

However, withholding taxes doesn’t take any of these variables into consideration.  Practically speaking, it would be very impractical to expect an employer or the IRS to anticipate this in advance.  The IRS’ guidance to employers is to withhold taxes from income.  The taxpayer is responsible for resolving any discrepancies through their tax return.

Challenge #3:  Expecting to ‘stop this interest-free loan’ only increases frustration.

Since there’s very little you can do to minimize your employer’s tax withholdings, you should probably focus more on the things that you can control.  However, instead of just dialing up the maximum number of exemptions, you should probably use the IRS’ Tax Withholding Calculator.  The withholding calculator, which is free to use, allows you to determine the right number of dependents so you can update your W-4 accordingly.  Once you get the right number, you can file an updated W-4 through your employer.  That way, you can make sure that you avoid having to pay an unexpected bill with your return.

Instead of trying to find more ways to decrease your withholdings, you might be better served looking for tax planning opportunities throughout the year.  While finding ways to decrease your tax bill will result in a larger ‘interest-free loan,’ the alternative is to simply let Uncle Sam keep the money.  Sitting down with a tax-focused financial planner is one of the best ways to discover tax planning opportunities.

Situations in Which You WANT To Err on the Side of Caution

While many people worry about that ‘interest-free loan,’ the truth is that the converse is actually a worse situation to be in.  If you do not pay enough estimated taxes throughout the year, the IRS can impose penalties and charge interest for the unpaid estimated taxes.  IRS Publication 505 prescribes guidance on estimated taxes.  Under Pub 505, the IRS does not impose penalties if the taxpayer falls under one of the following situations:

  • Withholdings and current estimated taxes will allow the taxpayer to owe less than $1,000 upon filing their tax return
  • Current withholdings equal 90% of the current tax bill
  • Current withholdings equal 100% of the previous year’s tax bill

Since most people usually meet one of these criteria, they don’t normally have to worry much about withholding estimated taxes.  Even if there’s a huge event in one year, Pub 505 doesn’t mandate estimated tax payment if your withholdings equal last year’s tax bill.  Since one-time events are expected to normalizes the following year, these events usually don’t trigger estimated taxes.

However, if there is an expectation of significant taxable events occurring over more than one year, then estimated taxes may apply.  Below are a couple of examples of such events:

  • Starting a business as you transition-I love to hear stories of people who build their own business as part of their transition from the military. Many people have the enviable problem of having such a successful business that their military job actually holds them back.  In this situation, their business takes off exponentially once they can focus on it full time.   While this is great for the business owner, it’s easy to become complacent about tax responsibility.  If the business is profitable, and that profit becomes a substantial part of total income, then there may be a requirement to pay estimated taxes.  Failure to do so could eventually lead to a situation in which the taxpayer is non-compliant.
  • Capital gains over several years-Tax planning often involves a systematic approach to liquidating assets. For example, instead of selling a large chunk of securities in one year, it might be prudent to do so over a multi-year period in order to remain in a lower tax bracket.  However, if your plan involves a significant amount of sales, you may want to pay attention to whether you need to pay estimated tax.  Here are a couple of other examples of capital gains situations that may warrant estimated taxes if done over a multiple-year period:
  • Roth conversions-When you convert a retirement account to a Roth account, you are paying current year taxes in exchange for being able to have tax-free distributions in the future. Unless you contributed to a non-deductible IRA (for people who don’t qualify for a deductible IRA), this involves calculating and paying the tax bill for the amount of the conversion.  Staggering large conversion amounts over multiple years can be part of a wise tax planning strategy.  However, paying estimated taxes may be a prudent part of your Roth conversion strategy.
  • Post-military career-Many people find that their first year (or two years) of post-military life can be pretty bumpy. A significant part of this rocky transition is due to the uncertainty regarding the balance between pension & a post-military career.  In these cases, holdings are now being done by two different employers (DoD and the new employer).  However, each employer only withholds according to the payroll information they have access to.  In fact, each employer may be underwithholding  because the combined income now raises the taxpayer into a higher tax bracket.  Many people are disappointed to find that they now owe taxes upon filing their return.  However, it could be counterproductive to take actions that would make this problem worse.


No one wants to let the government hold on to their money any longer than absolutely necessary.  However, it’s important to note:

  • There’s only so much you can do about giving Uncle Sam an interest-free loan
  • There’s much more value in tax planning than in trying to reduce your withholdings
  • As you transition to a post-military career, there may be situations in which a focus towards minimizing withholdings could be counterproductive to tax planning goals

If nothing else, tax season should drive home the importance of prudent tax planning.  If you’re interested in learning more about how tax planning can help your overall personal financial situation, you should talk with a tax-focused financial planner or tax professional.

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Homeowner Insurance Regulatory Offices By State

In a previous article, I described my homeowner’s insurance claim process.  In this article, I discussed how difficult it was to understand what I was entitled to under the law.  I was finally able to reach a better understanding once I became familiar with the Florida Homeowner’s Insurance Bill of Rights.

Since the insurance industry is regulated at the state level, these rights can differ from state to state.  Moreover, most states don’t even have a clearly defined ‘Bill of Rights.’  However, each state does have a homeowner’s insurance page that can help you understand what resources exist for your situation. Continue reading

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12 Lessons Learned From My Homeowner’s Insurance Claim

Executive Summary

This story is about my personal experience in dealing with a homeowner insurance claim for a roof replacement.  Although virtually every other home in my neighborhood experienced the same damage (from a freak hailstorm), my insurance claim became a long, drawn out affair.  While the settlement terms are beside the point, I hope this story will help steel someone for the challenges they might face if they’re dealing with a particularly tough insurance company. Continue reading

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5 Tax Planning Considerations of a Roth Conversion for Your TSP Account


Many people have taken advantage of the Roth TSP option since its inception in 2012.  However, there are still many federal employees and service members with most of their retirement savings in traditional accounts.  Naturally, this begs the question: “How do I convert my traditional account to a Roth account?”  This is also known as a Roth conversion.

The more appropriate approach should be to ask two questions:

  • Should I convert my traditional account to a Roth account?
  • If so, how do I do this in the most effective manner?  Effective manner indicates minimal loss of money through fees, taxes, etc.

As with most questions, the correct answer is not straightforward.  Rather, it’s an answer that depends on the person’s (or family’s) particular financial situation, goals, and values. Continue reading

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TSP Rollover to an IRA Account—Should I do it or Not?

This is a question that I received the other day from someone who has a lot on his plate.  He’s getting his financial life in order and was trying to figure out whether a TSP rollover was the right thing.  While everyone has different perspectives and situations, there is one constant:

Any financial decision you make should be consistent with a financial plan that reflects your values and goals.

This article will discuss the pros and cons of rolling your TSP account into an IRA.  However, any decision you make should be consistent with the long-term plan or strategy you have in place. Continue reading

Posted in Taxes, Thrift Savings Plan | 1 Comment

Six Steps to Hire a Military-Focused Financial Planner

Disclosure:  I am a financial planner.  With that said, there are many people who do not need a financial planner to live their best lives.  However, there are probably many more who could benefit from professional financial advice in at least one aspect of their lives.  This article is for them.


In the military, we’re pretty familiar with the financial counseling resources that are available, either through our commands or the installation’s support services.  However, there comes a time when we’ve paid off our credit cards, established an emergency savings account, and started putting money away for retirement.

At this point comes a logical question:  “Even though I feel like I’m doing all the right things, could I be doing more?”  This is where a financial planner can help you out.  However, with almost 300,000 financial advisers in the United States, finding one that meets your needs can be difficult.

Here are six steps to help you select the right planner for you. Continue reading

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Back to Basics: The Real Costs of a DUI


In the civilian world, there are professions where the impact of DUI conviction might not have an effect on the person’s career.  Not so with the military.  In the military, a DUI conviction is only the beginning, as it will have a direct career impact on the servicemember.

With that said, this article will focus on the military aspects of a DUI, particularly its impact on your ability to accumulate long-term wealth over the course of a career.  After all, the best financial planning advice is this:  Avoid bad decisions that lead to life-changing incidents.  Continue reading

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5 State Tax Considerations For Your Military Transition

Taxes can be a major consideration in your military transition planning.  As I outlined in a previous military pension article, your take-home pay can be up to 40% less than what you see on paper.  Federal taxes are obviously a significant part of that equation.  However, there are several ways in which state taxes (and local taxes) could play a part in your relocation decision. Continue reading

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Weekend Wrap-up: Military Personal Finance Articles You Should Read (11/11-11/17)

I hope you enjoy this version of the Weekend Wrap-up! Below are some of the top articles that I’ve read this week, most of which hail from our military financial blogger community. So, without further ado, here are this week’s articles: Continue reading

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What Military Landlords Should Know About Section 1250 Depreciation

Just because you joined the military, you shouldn’t have to give up the right to buy a house.   While there are many things to consider, you may:

  • Buy a starter home
  • Purchase a home that you plan to live in, fix up, and sell for profit
  • Buy a home that you plan to live in after leaving the military

Whatever the reason, things don’t always work out as planned.  When that happens, many military people become .  This article looks at one of the more overlooked aspects of being an accidental landlordSection 1250 depreciation. Continue reading

Posted in Real Estate, Taxes | 1 Comment