Sunday, June 19, 2011

I used to look forward to tax time

One "negative" thing, if you can call it that, when paying off a mortgage is the tax consequences. I've already had to reassure myself it was a good idea to pay the second mortgage off despite the tax deduction on the interest paid. But I thought I better take a closer look at how it is going to effect us next February when we file taxes (we always file early). Last year we got back around $700 on our Federal taxes, but had to pay the state $400. However, before we entered our energy efficient tax credit for a new patio door we had purchased in 2010, we were only going to get about $200 back on our Federal taxes. So we are already going to owe about $500 more this year. Even if everything else stayed the same, it looks like we would owe approximately $200 in taxes (we'd have to pay the state $400, but we'd get $200 of that back from Federal). But because I paid off the small mortgage, we will not be able to deduct as much interest on our taxes this year. Last year's tax records show we paid $2,131.21 in interest on the second mortgage. This year we only paid $295.23. I'm not an accountant, so I don't know the exact calculations to figure out how much more tax we'll owe, but here is my guestimation:

We paid $1,836.98 more interest last year than this year. So if we pay about 25% on our income taxes, I estimate we lowered our taxes by $459.25 last year by paying the interest (25% of $1,836.98). Again, not sure how accurate this is, so if you know, leave a comment below!

So if we assume we would owe $200 if everything else was the same as last year, but now we'll owe an additional $459.25 because we didn't pay as much interest, then I should be planning on a $659.25 tax bill in early 2012. I'll round that up to $700 because we'll also be paying a little less interest on the main mortgage as we slowly pay that down with just our regular payments. So I guess I better start another goal of saving up $700 so at least we're prepared for it. This will be the first year we'll ever have to pay in over all. I used to look forward to tax time because it meant getting money back.

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