What if I tell you there is a risk-free investment that is backed by the full faith and credit of the U.S. Government, will guarantee you an annual return of 8%, and is open to every taxpayer?
And this investment is made available by an unlikely source: IRS.
Yes, you didn't read it wrong. It is from the famous/infamous Internal Revenue Service.
I only learned this from my finally-arrived-after-10-month-delay tax return check for my 2005 federal tax return. (Long story short, my tax advisor can only file my 2005 tax return in January 2007 in order to satisfy certain requirements for foreign-earned income classification. And then my check got lost and we have to file a request using IRS Form 3911 to trace the check. IRS finally issued a replacement check last month.) To my surprise, the amount on the check is $408 higher than what we asked for the in the original return.
And what's on the check (copy below, certain identifiable details removed) revealed that the $408 difference is due to interest - paid by IRS to me for my overpayment:
Indeed, IRS has a 29-screen-long web page that explains overpayment interest. In a nutshell, if you overpaid your tax to IRS, IRS is required to pay interest on the overpayment starting from the due date of the return, or the receipt of your tax return, whichever is later. (Read: if you want to try this for your 2007 tax return, your overpayment won't accrue interest until April 15, 2008.)
In addition, IRS regularly adjusts and announces the prevailing interest rate that will be applied for overpayments (along with interest rate for underpayments and scenarios). Lately, the interest rate on overpayments is a mouthwatering 8%.
So add these all together, one can conceivably take advantage of this government backed high yield vehicle by follow these steps (I'm not promoting this and please try it at your own risk):
1) Make a sizable estimated tax payment in March 2008 for tax year 2007;
2) File your tax return before April 15, 2008 by including your March 2008 estimated tax payment and showing a big tax refund; request IRS to mail you the check instead of direct depositing to your bank;
3) Don't cash the check when you receive it;
4) Wait as long as you want and then file IRS Form 3911 to formally request a replacement check.
5) Your replacement check will include the accrued interest and congratulations on getting the 8% annual return on your overpayment.
One last thing: according to my tax advisor, the interest on overpayment is, still, taxable. But even with that, the 8% interest rate from the U.S. government handsomely beats any high-yield money market products out there by a large margin, right?