Tax Season 2012: Work No Longer Pays

[Bakunin]

Re: Tax Season 2012: Work No Longer Pays

I think the only reason I'd recommend paying down extra principal on a mortgage is if you're doing it to increase your equity and qualify for a refinance. If you're sitting on a 30 year loan right now and happened to buy when interest rates were substantially higher (they were 6-7% not *THAT* long ago - in the early to mid 2000s), the trade-off is considerably more favorable than simply dumping money into a 4-5% loan just for the sake of knocking down principal owed.

Saving money in a 401k or a Roth IRA isn't *that* limiting. Plus there's the whole issue of capturing employer matches which amount to free money (also, contributions to a Roth IRA can be withdrawn at any time without penalty - it's the earnings on the contributions that are limited in their use).

The bottom line is you don't want to overextend yourself in any one investment.

Establishing an emergency reserve account is a must for everyone as well. It's basically a form of "**** happens" insurance. Unfortunately, such things will earn next to nothing if you want to maintain any liquidity (via money market, savings accounts, or CD's).

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

Saving for retirement is a long-term activity (especially at my age).

Saving "for retirement" is probably the single most destructive myth to personal financial security perpetuated by the financial services advertisements. I cannot think of very many things that distort sensible decision-making more.

We save money to have cash available for opportunities and emergencies. If you develop good savings habits at a young age, you don't need to save "for retirement" ... you'll have savings throughout your entire life, which will include retirement when you get there. In the meantime you'll also have had use of your money along the way as well.

In fact, because of the 10% penalty tax, and limitations on the kinds of assets one typically can own inside a retirement plan, saving "for retirement" restricts your options: while you save for opportunites (they are limited) or emergencies (which requires either a penalty tax or a loan against the plan).

[Bob Gray]

Re: Tax Season 2012: Work No Longer Pays

I will concede that with the relative ease there is to getting out from under an upside down house with a short sale or such, the risk of gambling by overextending your finances, rather than being conservative financially, living within your means, and paying down your debts, is significantly reduced.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Usually income tax law is driven by expediency and political posturing, occasionally it is affected by atypical bouts of principle. Most of the time we come to expect a tussle between the President and Congress. Every now and then the judicial system has something incredibly salient to contribute as well.

The most famous non-Supreme Court jurist, Judge Learned Hand: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. " -- Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Ironic to me that BHO claims to be a constitutional scholar yet behaves as if he is unfamiliar with the law

Like Lionel Hutz on the Simpsons said, "There's the truth... and THE TRUTH! "

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

I suspect the urge to pay down mortgage principal is driven at least in part by the individual not wanting to be in debt. Another consideration is people paying it down aggressively who didn't put 20% down on the original note and are trying to eliminate PMI.

One interesting thing about opportunity cost is that you also have to weigh how much principal is involved in each one. At least I find it important to weigh nominally how much you are losing in a month in interest (or quarter, or year, or whatever measure you choose) vs. how much you are gaining in dividends and distributions. Now that my principal value is smaller for my loans, I'm more likely to introduce my money to dividends and distributions. Obviously this thinking is short-term instead of long-term, and other things need to be taken into account, such as the cost of the product (I mean, why put in your money so far from the next ex-dividend date when you can hold out for a better price, perhaps even set up a ladder for it).

Saving for retirement is a long-term activity (especially at my age). Paying off loans is relatively short term. Probably the best way to look at it is to budget a certain comfortable amount for retirement savings, budget to pay the loan at the on-time level, and then use your surplus (after bills, food, etc.) to decide whether to get extra into the market or to put the extra towards the loan.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

Usually income tax law is driven by expediency and political posturing, occasionally it is affected by atypical bouts of principle. Most of the time we come to expect a tussle between the President and Congress. Every now and then the judicial system has something incredibly salient to contribute as well.

The most famous non-Supreme Court jurist, Judge Learned Hand: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. " -- Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Ironic to me that BHO claims to be a constitutional scholar yet behaves as if he is unfamiliar with the law

[Bakunin]

Re: Tax Season 2012: Work No Longer Pays

While many Americans don't understand accounting, it seems like far fewer understand economics and the role of opportunity cost.

I suspect the urge to pay down mortgage principal is driven at least in part by the individual not wanting to be in debt. Another consideration is people paying it down aggressively who didn't put 20% down on the original note and are trying to eliminate PMI.

[bigmrg74]

Re: Tax Season 2012: Work No Longer Pays

You need the total amount of loan interest you paid in 2011. You might get a 1099 from each.

Yeah, I figured as much.

FYP. I'm not sure how the government refinancers work, as I've never had to use them, so I'm not sure if Sallie sends one. Bigmrg, you'll definitely need one from Citi. If you've been paying them online (checking, OK the name isn't Brent ), you should be able to download the 1098 information from your account. However, if your adjusted gross income before this deduction is more than $75,000, don't bother, because you won't be eligible to claim the deduction.

Yeah, I've always done the E pay option on everything. And yeah, don't think I'll have to worry about being over $75,000 on the year. If I was making that kind of scratch a year the Student loan would have been done with by now, along with my car loan. Only another $9,000+ to go on that yet. Just not really a fan of debt.

[ExileOnDaytonStreet]

The thread title is actually a play on one of the credits on the 1040 form from the past couple of years that is no longer available. It was called the "Making Work Pay Credit".

I stand corrected. I missed the pun.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

I get that taxation is much more inefficient and much more cumbersome than it has to be.

All the same, I don't think Ayn Rand herself could have written a less whiny title for this thread.

The thread title is actually a play on one of the credits on the 1040 form from the past couple of years that is no longer available. It was called the "Making Work Pay Credit".

[ExileOnDaytonStreet]

Re: Tax Season 2012: Work No Longer Pays

I get that taxation is much more inefficient and much more cumbersome than it has to be.

All the same, I don't think Ayn Rand herself could have written a less whiny title for this thread.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Depends. If you have a few extra bucks, you should always put them where you think you will get the best ROI. Reducing total interest paid on a mortgage is a nice "investment" because it is a guaranteed return, but on the other hand, you then have that capital locked up in your house so you may have opportunity costs of not being able to invest in other, even better options. If you're paying 5% tax-deductible interest, it only takes a 3.5-4% return elsewhere to beat paying down the mortgage faster.

Edit: and what FreshFish said.

This is true; I know I can hit 8.5% in the stock market pretty easily, so I've been waiting a little bit on the car and student loans (although have been making very accelerated payments), but it'd probably make more sense for me to go minimum on the car payments for now and put all the surplus in the stock market (and since I'm back to 5 grand, maybe use the rainy day portion for one of the two).

[LynahFan]

Re: Tax Season 2012: Work No Longer Pays

But why pay more in total than you have to? Throw a few extra bucks at the principal, and the total amount of interest you'll have to pay goes down!

Depends. If you have a few extra bucks, you should always put them where you think you will get the best ROI. Reducing total interest paid on a mortgage is a nice "investment" because it is a guaranteed return, but on the other hand, you then have that capital locked up in your house so you may have opportunity costs of not being able to invest in other, even better options. If you're paying 5% tax-deductible interest, it only takes a 3.5-4% return elsewhere to beat paying down the mortgage faster.

Edit: and what FreshFish said.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

But why pay more in total than you have to? Throw a few extra bucks at the principal, and the total amount of interest you'll have to pay goes down!

Depends on the interest rate and other debt to be serviced. Also depends upon the need for liquidity and flexibility. Once you pay extra toward principal, you no longer have that cash on hand. I'd much rather save the cash on hand and have the option to be able to pay off the entire mortgage early in one lump sum if I want. Especially in this day and age. The risks of inflation coming back in two years are just way too high for my comfort. I want a nice stockpile of silver coins first before I even think of sending extra principal payments.

Financial institutions promote losing money management strategies by getting us to look at our lives as a series of separate compartments while financially successful individuals generally have a good holistic view of the entire terrain.

Economics is the intersection between unlimited wants and limited resources.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

I don't mind paying interest on my mortgage because I really like the house we live in. The enjoyment is worth it.

But why pay more in total than you have to? Throw a few extra bucks at the principal, and the total amount of interest you'll have to pay goes down!