[Editor's Note: This is my favorite kind of guest post. It isn't written by a financial professional, but by regular doctors, just like you, who made some smart financial decisions early on in their career. I heard their story and asked them to share it with you. Enjoy. They wish to stay anonymous, but I assure you I have no financial relationship with them.]
$242,000 in student loan debt.
For my wife and I, that was our combined debt burden upon finishing our respective residencies in June 2013. When we graduated from medical school in 2010, we actually had slightly less debt, but our Income Based Repayments during residency were not even enough to keep up with the 6.8% interest rate, so our debt continued to grow during residency. Considering that the American Medical Association reports that the average 2013 medical graduate has accumulated $169,901 in debt [That figure is lower than the AAMC reports-ed], many new graduates will find themselves in a similar situation. [Actually, $242K for TWO doctors is fantastic, reflecting the fact that wise financial decisions aren't new for these two-ed.] After doing a quick calculation and realizing that our $242,000 loan at 6.8% would grow by approximately $17,000 annually, we decided to make erasing debt our top priority. Ultimately, we were able to pay off our entire debt in five-and-a-half months by living below our means, funneling money into our loans aggressively, and obtaining an interest-free loan from the IRS. These are the steps we took to knock out our debt in less than six months.
We Lived Like Residents
Put simply, we did not change much about our lifestyle. We traveled more frequently than we had as residents, but we traveled on a budget by taking advantage of rewards points and other deals. Half-price trips to the nearest beach resort were in the budget; first-class flights to Tahiti would have to wait. More importantly, we avoided upgrading our major belongings: no new cars, no new house, no new designer wardrobes. Overall, we probably increased our standard of living by less than 20%. We decided that the time for living the high-life was after we became debt-free. In our minds, anything we bought while still in debt needed to be something we were willing to pay for with a loan at 6.8% annually.
We Borrowed Interest-Free From the IRS
Just to be clear, the IRS is not publicly offering interest-free loans to new attendings, but these “loans” are available by taking advantage of the tax code. First off, we worked as independent contractors. There are multiple opportunities to work as an independent contractor including locum tenens agencies, hospital staffing agencies, or even directly with hospitals if you are willing to negotiate on your own. Working as independent contractors (self-employed) was important, because no income taxes were withheld from our paychecks. Of course, the IRS still wants its money, and it wants its money on-time. Independent contractors are required to pay quarterly estimated income taxes in order to keep up with their tax liability throughout the year.
However, there is no penalty from the IRS as long as one makes estimated payments equal to 100% of the previous year’s tax liability (110% if AGI > $150,000)–even if one pays only a small fraction of one’s tax liability for the current year. This is commonly referred to as the safe harbor rule for estimated taxes. In our case, our tax liability for 2012 (our final full year as medical residents) was less than $12,000. Therefore, we were only required to make quarterly estimated tax payments of $3,000 to be protected under the safe harbor for estimated taxes.
This temporary underpayment of our income taxes allowed us to make loan payments of $246,000 in our first 5.5 months of employment with total gross earnings of $263,000 during that span. Over this period, we made just one $4,000 estimated income tax payment. We spent $13,000 on everything else, including disability insurance, health insurance, and expenses. In effect, we were able to put nearly 94% of our gross earnings toward our loan balance, while only paying 1.5% income tax during the time we paid off our student loan debt. In total, we made loan payments equal to $246,000 over 5.5 months—a total of only $4,000 in interest on our original $242,000 debt after finishing residency. We surely saved thousands of dollars in interest by being able to pay off our loans so quickly with the help of the minimal income taxes paid during that period.
Again, this process involved working as an independent contractor. I am not a tax professional, and am unfamiliar with the finer points of trying perform a similar maneuver as a W-2 employee by decreasing withholdings from one's regular paycheck. [No reason you couldn't do something similar as long as you stayed within the safe harbor-ed] This would likely be best discussed with one's HR department and/or a tax professional. Review IRS publications 505 and 17 for the relevant tax code regarding estimated tax payments and safe harbor rules.
We Opened Tax Advantaged Accounts To Lower Our Tax Liability
By opening a Health Savings Account (HSA, available if one uses a High Deductible Health Plan), and separate Solo 401(k) plans (one for each of us), we gained some flexibility to decrease our tax liability as much as possible. These plans must be opened before the end of the tax year, but can be funded up until April 15 of the following year. Opening these accounts before the end of 2013 allowed us to save all of our earnings until April 15, 2014 in a high-yield online savings account. At that point, we calculated how much we would be able to fund each tax-deferred account while still making our required year-end tax payment. The great part about this was that the more we funded our accounts, the lower our tax bill would be!
As an aside, we decided that a Solo-401(k) plan made more sense for us compared to other self-employed retirement accounts (SEP-IRA, for instance) because of the greater contribution amounts allowed for at lower incomes. We did not have enough income in the half-year after finishing residency to maximally fund either plan, but the Solo-401(k) allowed for several thousands more in contributions than the SEP-IRA would have. Also, having a Solo-401(k) allows for a more painless process to perform backdoor Roth IRA conversions in the future, which is an added benefit for self-employed physicians.
In the end, our year-end tax bill was several times larger than our previous year’s tax liability (don’t forget, the first quarterly tax payment for the current year is also due on April 15!). While writing such a large check to the IRS on April 15 was a bit distressing, it was nice of Uncle Sam to lend us that money interest-free for a few months to allow us to become debt-free!
[Editor's Note: Wasn't that awesome! I hope you enjoyed reading that success story as much as I did. The best part about their approach is that it is completely reproducible. Keep your debt burden down in med school, bide your time with IBR in residency, and then explode in a frenzy of debt payoff madness upon residency graduation. While you might not be able to get your loans paid off by Christmas, the average doctor with an average medical school loan burden ought to be able to have it done within a year or two. Even with a very high loan burden, three to five years is a very realistic time period.]
Could you do this? Why or why not? Keep your comments positive or I'll edit/delete them because I want to encourage this type of guest post submission.
Kudos to the lifestyle choices that permitted fast debt repayment.
However, there is a reason that an employee would not be able to use an “IRS loan” to assist them.
An employer calculates the amount to be withheld based on the information supplied by the employee on the W-4 form. If the employee sought to lower his withholding as described in the post above, the employee would need to significantly overstate his number of allowances on his W-4 form.
It is illegal to willingly supply false or fraudulent information on your W-4 form. The IRS can impose a $500 penalty for doing so and order the employer to increase the withholding. More significantly, the IRS can seek criminal penalties which are punishable by a $1000 fine or up to 1 year imprisonment. The IRS has an easy to read pamphlet outlining these regulations, see Publication 4081.
Good point. I’m in this situation (W-2 employee wondering about safe harbor rules) and I read this line from Publication 4081… “you may have to pay a penalty if the following applies:
You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.”
My thought was knowing your previous year’s tax liability puts you in a good position to project the minimum amount of tax you need to have withheld for the current tax year (and hence, the number of allowances you can claim).
The publication also says: “These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. ”
I would not be eliminating the “proper” withholding of taxes, because as long as it’s 100% of my previous tax year’s liability, it is the proper amount. At least that’s my thinking, but I’m not a tax professional either. 🙂
I have personally filed a W-4 showing 99 allowances and a an additional fixed dollar amount equaling 100% of my previous year’s tax liability divided by 26 (the number of paychecks I receive per year).
From reading PUB 505 (couldn’t find 4081 on the IRS web site) it seems that the most likely penalty is that the IRS might direct your employer to withhold more, and to prevent you from filing a W-4 indicating any lesser withholding than what the IRS specified. It seems rather unlikely that the IRS will fine you and put you in jail if you comply with the safe harbor rules.
So many students and residents are laser focused on thinking they will immediately find their dream job, buy a fancy house, and fancy car as soon as they are out of residency. But that will just add more debt and create a lifeline debt burden. Whereas these guys became debt free in less than a year with minimal sacrifice. Good job.
Even without the tax tactics, it seems like this loan would have been paid off very quickly. How long would the loan payback have taken if taxes were paid in the typical fashion and everything else was kept constant? It’s an interesting strategy, but I think the excellent savings discipline and lack of lifestyle inflation had more to do with it than anything else.
I absolutely agree, GK. The student loans would be paid off within a year anyway. The true secret to paying off $242k isn’t the interest-free loan from the IRS. It’s having $570k/year income out of the gate and putting that income to work instead of spending it. After paying off the student loans, they had an accrued liability to the IRS — I’m guessing $100k or more — due in six months or so. Then they went on to pay off that.
It’s actually a risky move. If for some reason they are not able to come up with $100k by the time taxes are due, they would be in more trouble than if they still had $100k outstanding on the student loans.
Being 100k in debt to the IRS is great for motivation which I think is really a factor in all of this. They only saved between 5-10k with the IRS trick and less if they had just refinanced them. If they could compliment this with a backdoor way of running the loan payoff through a credit card with rewards, they could have gained a pair of international flights.
I disagree that this is “risky.” Living on $3K a month while making $48,000 a month seems the antithesis of risk. If they didn’t have the money in April to pay the IRS, they would have had it by June and only had to pay a little in interest and penalties. Sometimes the IRS interest rate is more favorable than the student loan interest rate!
But yea, the main reason they were able to do this is they continued to live like a resident despite a “1%” income. They also managed to keep their student loan burden far below average (which is around $200K per doctor these days) which helped a great deal.
Sorry “risky” isn’t the best choice of word. I was just referring to that people in general prefer to owe money with a due date farther away and to a party with a weaker enforcement power. Barring a black swan type of event, the move works.
Risky is the exact right word to describe the part of their activities regarding the title of the article – taking a “loan” from the IRS by significantly underwithholding. If anything had gone wrong during that time (death of one partner, job loss, disability, family emergency, economic crash, or any of a hundred other things) they may have ended up in an untenable situation.
The fact that their other activities were the opposite of risky has almost no bearing. It somewhat but not totally offsets the risk of the tax withholding move. But it doesn’t inherently change the fact that the IRS gambit was risky.
I disagree with ArkyDore above that the IRS liability would serve as motivation. Anyone living on less than 5% of their earnings clearly does not have a motivation problem.
Be warned that not all states respect the IRS safe harbor.
And some have an even better deal like Utah- no estimated payments due at all. I pay my entire year’s tax bill in April of the next year.
Great story. Just great. So difficult to not go crazy as soon as residency is over. Hopefully some residents will read this and think that they can wait just another 6 – 18 months to inflate the lifestyle.
Excellent strategy. The only thing I would add is that I don’t see this as “borrowing money from the IRS”. More accurately, I think it’s the avoidance of interest-free lending to the government before your tax bill is due.
Eh… When one makes a crap ton, debt payoff isn’t that impressive to me. If my family had your income directly out of residency I could pay off all your debt in the first year, and the taxes, and still have more take home pay that what I have now….. And I’m a doctor.
Exactly…a family of two who made more in 5.5 months than I made in my first year out. Same thing when I hear my single friends talk about how quickly they paid off student loans….congratulations I guess…you didn’t spend all of your 350k in one year….on yourself. These scenarios are not anywhere near the typical new attending.
Stories about new attendings with a stay at home spouse and several young kids who need to go to college in 15 years and who don’t make 45k a month would be nice.
tons of haters on here today! i think this is a great story. it can inspire all of us to get out of debt and get those student loans paid off.
to frank and others – you chose to have kids, a stay at home wife, etc etc. others chose not to have any kids, and have spouses that make more than us. quit bitching about the choices you made. if you didn’t want to support your kids, don’t have them! it’s a pretty simple decision.
it’s so easy to say, “if only i made xxx amount i wouldn’t have any debt, any money problems.” that’s crap – you make your budget reflect the things you value in your life. this couple wanted to get out of debt asap – and they did it. your budget clearly reflects your value of having kids and having a spouse that can afford to stay home with them. quit complaining about it!
You’re right. I think I read this article with the wrong point of view and obviously the wrong attitude.
One of my children uhh I mean expenses 😉 was up all night puking and I was grumpy.
ha! sorry to hear you were up all night. hopefully they weren’t puking on you!
i am so grateful for this blog as well. helped open my eyes to personal finance. i think the aha moment for me was taking a hard look at my budget and making sure it reflected the things i valued. i sure value being debt free!
You know my email address. I’d love to publish a post about an FP attending who paid off $200K in loans in 2 years while funding his kids’ college accounts.
I’m actually more in agreement with you… but if you take the article as just learning one way you may be able to leverage your tax bill it’s fine.
Congrats to the authors, but again you are right, this is not a very typical situation at all. Dual attending salary (combined both way above average, to boot) with relatively low student loan debt does not exactly deserve huge praise. Praise, yes, for living the common mantra of live like a resident for a few years, though.
It’s hardly a sin to make a lot of money and manage it well. They did everything right, so good for them. Just because someone else can’t get out of debt quite as fast (due to lower income or higher debt) takes nothing away from them. It would be exactly the same as an FP with a stay-at-home wife who paid off $200K in debt in 18 months. Both did as well as they could.
And while they had dual attending salary, they also had dual debt. It wasn’t like only one had debt and the other was debt free. They clearly state that they had a combined debt. I see no reason why an FP couldn’t do what you propose. They could pull in $250k doing locums. Their wife and kid(s) could travel with them, especially if they were not in school yet or doing home schooling. It is all about how bad you want to get it done.
It’s all about priorities. If you choose to be a pediatrician, have kids, have the wife stay home, live in San Francisco, and work at an academic job, you will have a very long wait to get to debt-free living.
I had my debt paid off in a couple of years with a stay-at-home wife, but it only happened because I made certain choices (higher paying specialty, moving somewhere where there was a shortage of my specialty, buying a small house, driving old cars…)
I could have made even more extreme choices — an even smaller house in a bad part of town, move to a part of the country that I hated but where compensation was even higher, insisted that my wife get a full-time job and let the kids fend for themselves before and after school (she worked part-time when they were in school or when I was at home with them).
Are any one of the above three choices right or wrong — not in my book. You could have very good reasons for doing any of them — or some other.
The important thing is that we make choices with our eyes wide open and being brutally honest with ourselves and our families about the results of the choices (for example, I rarely saw my kids for 5 years while busting through surgical training in the days before hours were restricted for residents. Had I been a psychiatrist, I would have seen them a lot more and had a year less of training. Or I could have chosen an even higher-paying specialty that I didn’t enjoy.
Becoming debt-free quickly was a top priority for my wife and me, and we lived and made decisions accordingly — but not such a top priority that we didn’t allow ourselves a modestly nicer lifestyle than we had as residents, or such that we were willing to move someplace we hated, or such that I would have chosen to be a neurosurgeon just for the money.
All too often we docs are like leaves drifting down a stream — leaving our financial futures to fate. Fate usually isn’t particularly kind…
A lot of wisdom in that comment.
Lots of haters on here today. Thanks for the post WCI, I appreciated it a lot.
Haha…not hating…didn’t mean to sound so snarky. I follow this blog, bought the book, and try to follow his principles. My point was this article doesn’t describe “regular physicians” as it says in the opening commentary. At least in my immediate circle most docs finish residency, take an employee job, bring home around 10k a month after retirement contributions and have a few kids which means more mouths to feed, braces, activities etc. Most of them are not a two physician couple with no kids so they can live in a 600sqft apartment and make almost 50k a month with only 242k combined in debt(seriously that’s nothing compared a few people I know). It’s like saying “well jay z paid off all his debt in one year why can’t you dr frank” 🙂
It’s not their fault they kept their debt level down, chose specialties that pay a lot, chose to delay kids, and chose to live like residents for 8 months. Oh wait, yes it is. I understand that not everyone is in the same situation, but it’s not like another doc could not have chosen to do what they did. At any rate, part of the reason I published the story is that it is so unusual. As you’ll recall, I generally recommend the live like a resident thing for 2-5 years until the loans are gone. If you can do it in 6 months, so much the better.
You’re right wci. It’s pure jealousy on my part. Not that I would ever take back my kids(well maybe some days) or trade my current life but I’m jealous of people that have that commitment to becoming debt free. Now we didn’t go crazy( no new cars or vacations)but I did get a 375k mortgage 6 months after finishing fellowship but sometimes I wish I could’ve convinced my wife to stay in our 1000 sqft house but with 3 kids that was never going to happen.
Once you get that mortgage,even without car payments or lots of toys, you’re stuck…unless I sell the house I’ll never be able to pay off student loans like that without sacrificing retirement or 529 plans. Sure if I stopped all retirement and college contributions for the next 10 years I could do it but then I’m 45 with no debt AND no savings.
Life is a balance. If you don’t like your current balance, change it. But you’re right that locking yourself into a big mortgage (or big student loan payments) is like handcuffs.
I think what they did is great. So what if they make a ton, most people who have been through that much school would have blown the entire amount the first year. It’s tough not to have the “I deserve it” mentality. And those who say that they make a ton so it’s not that big a deal, it’s all about the percentages. I don’t care if you make a million dollars a year, living on less than 10% of it is amazing. Congrats to these new doctors!
I do think it’s to bad they don’t feel comfortable coming out about who they are etc., but I understand it with at the haters out there ready to pull each other down. It’s taboo to talk about how you did something like this because “their situation is so different that it can’t possibly be applied to anyone else.” Sad and ridiculous.
I’m not a hater. And I do think its impressive that they lived on 10% a year but that ignores the point that the could have still had the “I deserve it” mentality and been out of debt in 1-2 years. I live comfortably but I still need to monitor my spending and I still can’t afford to have as much savings as I would like. They would have an equal income and pay off all their debt in one year, maybe two. So is it great for them YES. Is it impressive, NOT REALLY.
I guess we will have to disagree. I think that 2 doctors living on just over $2,000 a month is impressive as I have non-doc friends that make 10% of what this couple does and spend more than they do each month. So while it’s not what I did, I have a wife, kids and bought a house etc., I still think it’s impressive, it’s not for everyone, but impressive.
Technically its more like $2500 a month and if they had no car payment and werre living in an apartment that’s not that hard to do. Both of my MA’s make about that a month PRE-TAX and pay their bills while raising kids.
It seems like a lot because its a lot less than you live off of, but rent and utilities is probably less than $1500 a month for an apartment.
Kudos to them. Please keep sharing similar stories because I think it’s good, especially for young residents, to see that this can be done.
This thread may also be of interest:
forums.studentdoctor.net/threads/has-anybody-successfully-paid-off-their-loans-early.1000571/
On a somewhat related note, if someone works both as a W2 employee and does independent contractor work, if they max out their employer 401k at 17k, can you then open up a solo 401k on top of that?
The idea being, if it is in fact possible, to then defer up to 25% of your independent contractor income (to a limit of 52k total), if I understand right.
Yes.
I’m going to piggybank off of that: if a fellow who graduates in July made roughly $25k in 1099 moonlighting income in the first 6 months of the year and then took a job as an attending but quit the moonlighting job, could he then use income made in the last 6 months and open a solo-401k and fund it with up to $25k?
That is: does a solo 401k need to be funded during the time of contract employment, or can it be funded at anytime in the same tax year?
Thanks!
Any time in the same tax year. The individual 401(k) would be for the 1099 moonlighting income. But you couldn’t put $25K in it if you made $25K. Remember you also only get one “employee” contribution ($17.5K) per year no matter how many jobs, employers, or 401(k)s, you have.
That wasn’t thought through thoroughly. I think I could only contribute up to 20% (as a sole proprietor) of $26,000 earned as a moonlighter, as I would also be using my new employer’s 401k.
I should also have said piggback–not bank. And that piggybank wasn’t as big as I might have thought. At least I don’t think so.
Just to make sure I have this right, some example scenarios:
Scenario A
W2 income 150k (irrelevant, but just to illustrate there is a W2 income)
Independent Contractor Income 140k
Traditional 401 k contribution 17k
Solo 401k ’employee contribution’ 0
Solo 401k ’employer contribution’ 35k
Scenario B
W2 income 150k
Independent Contractor income 140k
Traditional 401 k contribution 10k
Solo 401k ’employee contribution’ 7k
Solo 401k ’employer contribution 35k
Does that all work out? Does this mean as long as you have at least a 140k 1099 income you always have the option max out to 52k.?
The $52K limit is per plan. You can put $52K into the Solo 401(k) and $52K into a 401(k)/profit-sharing plan. But you only get one employee contribution and the employers must be unrelated.
It is impressive because the whole point is that they didn’t take on extra expenses (Frank, see: “several young kids”, “stay at home wife”). Kudos to them for seeing those gigantic paychecks and living on almost nothing. Very hard to do. Awesome to hear this, I hope you test yourselves a little now that your debt free!
Apologies to wci. I was grumpy this morning and fired off stupid comments. You publish such a great blog and you’re site has been invaluable to me as I transitioned from fellow to attending. Because of you I pump thousands of dollars every month into retirement accounts and have no consumer debt.
My bad
I am addicted to this website! This is my first time commenting on any forum, so please excuse my lack of experience.
I am a stay at home mom with 4 children and My husband is a physician. I hope our experience can help someone out there.
We paid our loans off in our first year out of fellowship. We had over $125,000 in student loans. I chose to have 4 kids (I actually wanted to wait a while…but had a bit of a surprise on the last 2…I think the IUD split the egg in two, because my last 2 are twins…yes, with an IUD :)) Anyway, we learned to live on literally nothing during residency and fellowship. I stayed at home with 4 kids under the age of 4 during our 5 year residency and 2 year fellowship. We lived on what my husband made which at the time was $27,000 with no opportunities to moonlight. (The hospital wouldn’t allow the general surgeon residents to moonlight because they were literally working 120 hours a week. This was before the 80 hour work week came into play).
After his fellowship, he stayed on at the University where he did his Fellowship at, and his starting salary was $200K. We paid off his student loans off in our first year. We chose a high deductible and a contributed to our medical savings account as soon as he started at the University, fully funded whatever retirement vehicles we could. We lived on what he made as a resident/fellow for 2 years. I loved it when people would ask when will your husband graduate….and I would tell them he already had. Our lifestyle didn’t change one bit. We drove crappy cars that were paid for, lived in a tiny little house that we paid off during those 2 years. I couldn’t imagine upgrading our lifestyle knowing that I owed somebody money. It literally made me crazy. It was a huge sacrifice to do this…and honestly, it wasn’t super fun going without a lot of the things that most people think are necessities. But the feeling of being debt free was worth all of the sacrifices we chose to make.
It totally can be done one one salary, a stay at home mom and 4 kids 🙂
Thank you for sharing your story. Believe it or not, some people can’t even imagine doing it the way you did, and hearing your story can help a lot of them.
Love this story. My wife and I actually joke about when I will stop working and retire so we can start spending. Granted, we live well and spend an average american salary, but compared to others I associate with…
It’s a little bit of Dave Ramsey in living like no one else so you can live like no one else. Congratulations on your successes with money, family and work!
Thanks for a great story. Their situation and accomplishment are at the far end of one side of the bell curve to be sure, but its a nice depiction of a couple achieving their goal and it highlights how much room for improvement there is for a lot of us on the debt management front.
I do want to point out, thought, that becoming debt-free should never be the primary driver for what field one goes into and how one practices medicine. Going into a high-paying specialty is great, if thats the field you’re interested in. Going into a high-paying specialty solely to make a lot of money, whether it be to pay down debt, save quickly for an early retirement, or spend lavishly, is a prescription for career dissatisfaction (not to mention the questions it raises about how good your patient care is if the bottom line is your primary motivator).
I hope this couple chose their respective specialties for the right reasons, and kudos to them if they did (i’m jealous to be sure). As an academic cardiologist, i’ll never starve, but i won’t be paying down my $200K in loans that quickly either (to be fair, most of my loans are at 2.8%, so unless the long-term expected returns on the stock market tank i won’t be paying them off a day earlier than 30 years). Thanks again for a great story.
I agree that being unhappy throughout your career for financial reasons is pretty dumb. However, I find that medical students generally don’t quite consider salary and lifestyle enough in making their specialty choices. Thus I keep hearing from regretful/jealous primary care doctors in their 40s or 50s. As I mention in my book, if you’re choosing between two specialties both of which you love, pick the one with the better salary/lifestyle. But far better to be a happy pediatrician than an unhappy back surgeon. Studies show more than $75,000 a year doesn’t make you any happier anyway.
Fed income tax is legally ‘pay as you go’ , meaning that as you receive income, you pay your share of taxes on it. Estimated taxes are there to
adjust for fluctuation in income that would cause you to underpay your taxes.
2nd, if your taxes paid during the year are more than 10% off of the mark, you are a prime candidate for an Audit. I don’t know about you, but I would never paint that target on my forehead.
Did their tactic work? Apparently . would I recommend to anyone? never.
Would I publish what I did somewhere the IRS could see it? Definitely never .
What is your source for this information?
It does not appear that this couple has violated the tax code based on the information presented.
When you say, “..if your taxes paid during the year are more than 10% off of the mark, you are a prime candidate for an Audit,” what data is this based upon?
You seem to be suggesting that people should pay their taxes earlier than they are actually due (thereby giving the government an interest free loan), instead of using that money until it is technically due to the IRS. This couple apparently paid their taxes on time, so I disagree with the sentiment of your post. Nobody owes the IRS more than what the tax code states, and that includes paying earlier than necessary and lending money for free.
You are absolutely right. There is no violation of the tax code in this situation. The first year that I was in practice, I also moved to a new state that has an income tax. I paid a tiny amount in federal estimates and nothing in state estimates until the bill was due the next year on April 15. This is standard operating procedure. Now the question of lying on the number of exemptions on a W-4 if you are an employed physician is an entirely different matter. I believe that this would be illegal if it resulted in your withholding not hitting the appropriate threshold.
Komrad – on the subject of an audit – while it’s a waste of everyone’s time, who really cares if you get audited if you’re playing by the rules and aren’t trying to hide any skeletons? Most likely, it would be a simple compliance audit and not a top to bottom full audit anyways.
We took advantage of this rule as well a number of years back. We didn’t have any troubles – it’s entirely legal. People that are scared to leverage the tax code in legal, ethical ways always over pay. Not sure why anyone would voluntarily do that.
I’m assuming this couple is 30 years old. Would they be better off at age 65 by putting 220K at age 30 in a vanguard fund that accrues 7-8 percent per year ( worth 2.2 million at 65) and just paying the loans at minimum rate for 10 years?
My apologies it’d be worth 3.2 million at age 65 with 8% vanguard growth.
There’s a mathematically correct answer and there’s a behaviorally correct answer. Personal finance is both personal and finance. Plus, the “7-8%” isn’t guaranteed, especially after tax and student loans are both high interest, non-deductible, and must be “fed” every month.