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The Pain Of Taxes Without A Mortgage

by The Happy Rock on April 20, 2011

Raise My Taxes Protest SignI procrastinated filling taxes this year again…no big deal.  Late filing seems to be common practice for those of us who usually owe money each year.  The pain came when I received word that we need to file for extension and pay DOUBLE the normal amount to the fed and the state.   I was shocked.  I saved and paid quarterlies the same as I did the last five years and we got killed worse than normal.  Now I am trying to figure out what happened and recover.

A Little History

Every since we got married we have owed thousands of dollars in taxes each year.  The only times we haven’t owed are tax years when we were able to claim the adoption tax credit(a beautiful thing). The main ‘problem’ is that The Rockette has worked full or part time since we got married and from what I can see the tax code tends to not be as helpful to married couples with dual incomes.

The Rockette now works part-time as a consultant which means we are responsible for paying quarterly taxes.  The same holds true for my internet income streams.   Like previous years I paid less in quarterly taxes, because I would rather keep my money for as long as possible rather than overpay and let the government hold without having to pay interest.    It’s purely principle, not necessarily a wise personal finance decision.  It gives me a false sense of power in a situation were I am powerless.

Skip Forward To The First Year Without A Mortgage

This year is our first full year of being 100% debt free and renters. This means we lost our mortgage interest and property tax deductions.   Ouch!  I hadn’t really thought about the tax consequences, and I definitely wasn’t prepared for that loss to cause a doubling of our tax bill.

Ready for Pain

The lucky part is that we are ready to handle the pain.  We had already saved normally, so we had half of the bill sitting in a ‘2010 taxes’ account in ING.  The rest of the pain was minimized by the hard work we put into become debt free and having an emergency fund.   Because of that, the tax bill became a nuisance rather than a catastrophe.  In the past this would have  thrown our life and finances into a tailspin.  It will take a little while to replace the money the emergency fund, but that is nothing compared to the damage and stress it would have done to us 6 or 7 seven years ago.

Listen To The CPA

One of the benefits of a of having a CPA is I will receive an adjusted quarterly schedule when my taxes are finished that will take this into account and factor in a new child.  If I had of followed the CPA’s recommended schedule this year, we would have been almost in line with were we expected to be.   I need to start fully trusting the CPA rather than still trying to partially follow my hacked together plan of years past.

Thanks to the emergency fund, we can learn and move on.  I have bigger and better things to worry about!  I am ready to start my next web project which you will hear about in the future.

{ 9 comments… read them below or add one }

Ed April 20, 2011 at 10:30 am

I’m beginning to question the whole mortage deduction thing. Why should non-homeowners have to pay for my tax deduction?
It isn’t fair. We need a simpler tax system. A flatter tax system.

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The Happy Rock April 21, 2011 at 12:09 pm

Thanks for the comment Ed. I agree that the tax system is hopelessly complex, though I don’t think me as a non-homeowner is paying for your tax deduction. I don’t pay anymore taxes, because you have a mortgage. I also have an equal opportunity to go into mortgage debt and claim the credit. The opportunity doesn’t exist for those in the lower class.

The part that I don’t have any qualifications to speak to is whether encouraging home ownership is good for the country, the economy, and society. I don’t know what would be effected if that promise was pulled and whether the consequences would be good or bad.

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Calvin Hamler May 6, 2011 at 7:09 pm

Can’t fault you for the late filing, agreed with the idea that those of us who owe tend to procrastinate. I’ve liked following your story. Keep up the good work.

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John Smith June 23, 2011 at 4:56 pm

We need FLAT tax. Best option, PAY ON PURCHASES. That is fair and simple.

Home ownership is a FARCE, we do not OWN anything. The BANK owns the home. The great majority of Americans do not OWN property – they are borrowing it from the bank until their debt exceeds their ability to repay and then they foreclose or go bankrupt.

Home OWNERSHIP is when we relieve ourselves from the bondage of debt and do not OWE the bank anymore money.

New laws should stipulate 20% down on all new home purchases. We should not be allowed to enter such a HUGE debt program. Banks love it, they love that DOUBLE interest payment for the life of the loan.

Move to a smaller house, home Ownership is GREAT, DEBT is not. I am moving to a 15 year loan, renting and saving for my next home to pay cash.

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Rich October 2, 2011 at 5:09 am

Slow down. “The great majority of Americans do not OWN property – they are borrowing it from the bank until their debt exceeds their ability to repay and then they foreclose or go bankrupt.” No, the great majority do not foreclose or go bankrupt.

The consumption tax always sounds like a easy, fair idea. However, someone making $300,000 a year will throw a much larger percentage of their income into savings and investments vs. someone who makes $30,000 a year and uses almost every dime to get by. Therefore, once again, your $300,000/yr person will pay a much lower percentage of their income in taxes.

My Dad was able to retire at 50 having had to completely restart his savings in his late 30s. On a good, but not enormous salary. When I asked him about how he pulled that a while back, he was very clear that he did the basics (saved, maxed out his 401ks etc.), but that he was very fortunate in the economy. The stock market went from 900 to 3600. A house he bought at $125,000 he is valued at $550,000 (post crash). And my personal favorite, he bought a VW rabbit diesel in 1980 for $3200 new, paid cash and drove for 22 years. Think about 22 years of putting car payments in the bank.

For me to have that economy, the market would have to go from 12,500 to 50,000. His 550,000 house to 2.2 million. Seem realistic?

Real income has barely moved in decades. His $3,200 rabbit diesel is now $22,000. His $.70/gallon gas is now $4. But salaries haven’t moved even close to that quickly. The only incomes that have increased at these rates is the very highest earners where people like the HP ceo got 20+ million after getting fired for failing for 11 months.

Lifestyle expectation must change. Unless you dramatically outperform your parents professionally, you can’t afford the same life they had. It’s an unfortunate truth, but a truth nonetheless.

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Jonathan November 15, 2011 at 12:47 pm

Tax systems in most developed countries are clunky and awkward and in my opinion are too complex.

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Jonathan March 4, 2012 at 11:12 am

It’s easily done, but it’s amazing how much you get charged for late filing.

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Joseph Perrotta April 24, 2012 at 12:08 pm

In response to mortgage interest credit being unfair, that credit is a large driver of demand for the housing market. Think about how much worse the housing crash would be if you start taking away money from people who owned houses? Not to mention how much slower it will recover if you remove that incentive.

I do agree that for higher priced homes and vacation homes, the interest credit should be lowered/eliminated, but for the average American it helps increase demand and make housing affordable.

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John April 26, 2012 at 6:17 pm

I haven’t really thought about the tax deductions that we’re getting for having a mortgage! Our tax guy handles all of that for us. As renters I’m sure you have to pay quite a bit more in taxes . . . but as you know with a little planning you can make it!

Good luck to you!

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