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Originally Posted by UntilTheNDofTimE;35989233
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Quick examples to determine how much more taxes you will pay with no information provided:[/color]
If you paid $1000 per month in interest on your home and $3,000 per year in property taxes this is $15,000 that you were able to use as deductions for your taxes. Assuming you had an additional $5,000 in misc. deductions (donations, etc...) that would bring your schedule A deductions to $20,000. The standard deduction for MFJ is $12,400. This means that you would pay tax on an additional $6600 than you did last year. Assuming this income falls into the 28% bracket you would pay an additional $1800 in taxes. To not pay this additional $1800 in taxes you would have to put $6600 into your 401(k) plan or a Traditional IRA. You can use this simple math with your own financial numbers to determine how much you will need to sock away to not pay any additional tax than you did when you owned your home
Good analysis, but you also need to weigh this against how much you would save in interest if you devoted that money to paying the debt.
Good analysis, but you also need to weigh this against how much you would save in interest if you devoted that money to paying the debt.
Of course but the original poster was concerned with paying more taxes. The text you highlighted was an example to ensure you pay no additional taxes on your extra income.
Hubby were homeowners for 20 years and we got tired of all the stress and worries of maintaining a house. So we sold the house and now we are renters. We have a lot more disposable income now because the expenses to rent (including utilities and renters' insurance) is much less than what we were paying when we owned our house.
We have 2 immediate financial goals: to pay off debt and to save for retirement. The problem is, I am not sure which we should pursue first. My first inclination is to pay off debt, but I am worried that now that we no longer have the property tax deduction to claim on our income taxes, we may be pushed into a higher tax bracket. So that makes me wonder if we should sock away whatever necessary into retirement to keep us out of a higher tax bracket.
Should we meet with a financial planner to sort all this out? If so, what type of financial professional should we seek out to help us figure out how to maximize our money which keeping our income taxes at bay?
Any advice would be appreciated.
THANKS!
Sassy -- do both at the same time.
Let's say you have 20,000 in now available income, you have 30K in debt and you have 0 in retirement.
If you pay off everything in a year and a half, you still have nothing in retirement. If you decide to put half into debt repayment and half in retirement, in three years you will have no debt and 30K in retirement.
Here's where you have to run the numbers. What interest rate(s) is your debt? You can figure out easily how much it will cost you to pay off that fictitious 30k in one and a half years versus 3 years. Lets say you have 15K at 7.9% and 15K at 22%. I'd shovel what I could onto the largest interest rated debt FIRST, and pay the minimum on your second debt. Get rid of the highest costing one first.
And put away the other half into something based on your timeline and risk factors.
At the end of the three years you can start chunking in the whole 20K a year.
Good analysis, but you also need to weigh this against how much you would save in interest if you devoted that money to paying the debt.
exactly , not having a debt payment saves 12k right off the bat not being paid out.
last time i looked that beat a deduction for 1/3 of it.
unless you can get a lot better return and most small investors stink at investing the deduction is no match for losing the expense.
would you spend 3 bucks to win a 1 buck prize?
deductions are rebates on expenses , they only return a portion of what you spent so all things being equal deductions are never better than not having an expense unless the opportunity cost is guaranteed better.
Pay off debt first. You will be amazed at how fast you can save money when you don't have debt. If you want a shock, figure out just how much you pay in interest every money on your debt. With no debt, all that interest could be going into saving.
This only works if you eliminate further debt and do put the saved money away for safe keeping. Too many people who become debt free can't wait to jump back into debt...
We similarly grew tired of the time, effort and cost and SFH ownership and maintenance, plus, I'm not really a yard person. But, even in retirement, one must live somewhere ... also, the housing market is clearly recovering. We moved to condos in 2002 (upscale, NOT converted apartments) and will probably never move back to a SFH.
Foreclosures and financial defaults have put tremendous pressure on the rental market from people who can no longer qualify to buy. Why pay higher rental rates and still have little control over your 'neighbors/neighborhood'? Condos also offer a better location selection than apartments and SFH's - without the work. Instead, of a "Pay off debt or save for Retirement" dilemma, consider a good condo and accomplish both.
Make sure you have 3 months' worth of expenses saved up first.
Make sure you are getting the full company match for any 401k/Roth 401k that is available, this is almost always going to be your best return overall. You will typically get either a 50% or 100% return on your money, so unless you have debt at a higher interest rate than that, this always comes first after a basic emergency fund.
Increase emergency fund to 6 months' worth.
Pay off any debt that is over 5% interest (arbitrary number, but something that you could likely beat on investments), highest interest rate first.
Assuming you aren't over the income limits, start maxing out 2 (one for you and one for spouse) IRA or Roth IRA accounts. I prefer Roth, but that is up to you. If you are wanting the write off now, you'd go with the regular IRA and regular 401k. The opportunity to invest in these is lost every year you don't (there is a limit each year, and you can't go back now and invest for prior years), so start that as soon as you finish the first few items on the list. You would have until April 15th (I think?), 2015 to max out for 2014.
Increase your emergency fund to cover 12 months' worth.
Increase your retirement savings to as much as you can afford, more is better.
Pay off any remaining debt with just the minimum payments, since money invested for retirement should be beating the interest on the debt.
Let's say you have 20,000 in now available income, you have 30K in debt and you have 0 in retirement.
If you pay off everything in a year and a half, you still have nothing in retirement. If you decide to put half into debt repayment and half in retirement, in three years you will have no debt and 30K in retirement.
Here's where you have to run the numbers. What interest rate(s) is your debt? You can figure out easily how much it will cost you to pay off that fictitious 30k in one and a half years versus 3 years. Lets say you have 15K at 7.9% and 15K at 22%. I'd shovel what I could onto the largest interest rated debt FIRST, and pay the minimum on your second debt. Get rid of the highest costing one first.
And put away the other half into something based on your timeline and risk factors.
At the end of the three years you can start chunking in the whole 20K a year.
What Tallysmom said.
No reason you can't do both at the same time.
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