Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Monday, February 4, 2008

Tax Blues

I used TurboTax to run through our 2007 federal taxes over the weekend, eager to learn the size of our refund. To my surprise, it looks like we owe tax this year. Fortunately, the amount is not excessive, so it won't put us into financial trouble. Still, I was disappointed because I had been hoping to apply the refund amount to our additional principal payment in February.

This is the first time I can remember owing year-end taxes since I started filing federal returns back in high school. By comparing our 2006 return to the numbers from 2007, I can see that our combined income increased this year, but our deductions decreased. I think there are at least two reasons for this.

First, we had to pay mortgage interest and property taxes on two residences for about three months in 2006, which meant a higher total deductible tax/interest pool to draw upon. That didn't happen in 2007, because we lived in our current house for the entire calendar year and didn't buy any new property (though we had our eyes on Marvin Gardens and Boardwalk).

Second, I made a bad assumption that we wouldn't need to adjust our W-4 allowances after we married in 2006. My reasoning was that we were still both working full time, and still supporting ourselves, so we kept our allowances at one per person. After doing some additional research into the W-4 form, I discovered that married couples in our situation (two full-time workers without any dependents) are advised to claim zero allowances. In 2007, we simply didn't have enough money withheld from each paycheck to cover our year-end tax bill. In 2006 we both spent part of the year working as single people, which meant that we didn't run into a shortfall when filing last year's taxes. I don't know whether this is because single people have more withheld proportionally, or whether married couples are taxed at a different rate, or some combination of the two.

As a result of this new information, I've adjusted our allowances to zero going forward. However, since this won't help us in the 2007 tax year, we'll need to incorporate the cost of the tax due into the next three months' budget (February through April). I'll wait until the first week of April
to pay the taxes so we can maximize our additional principal payments for February and March, compounding our mortgage interest savings over time.

I estimate we'll be able to add about $2,000 extra principal to this month's payment, which is at least $1,000 shy of what I had originally hoped for February. Even still, I can see that we have a reasonable shot at reaching our goal.
I created an Excel spreadsheet which allows me to run some hypothetical scenarios over a 60-month period. It calculates the average amount of principal needed each month to reduce the balance to zero by the end of the five-year window. Although the average monthly amount obviously would be less if we could contribute $3,000 instead of $2,000, we should be able to make up the difference during the next few months without too much difficulty.

I'm going to do some more research and find out what additional deductions we can take advantage of (if any) before finalizing the tax return. I'm usually eager to file as early as possible, but since we'll owe tax for 2007, I'll take my time and make sure we haven't left any deductions on the table.

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