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

Sunday, February 7, 2010

Taxes and Interest

I completed our 2009 tax returns this weekend. Happily, almost exclusively due to my wife's hard work, our income was almost eleven percent higher in 2009 than it was the year before. And because of our focus on killing the mortgage, we paid about 37% less in mortgage interest in 2009 than in 2008.

It would be easy for me to say something like, "Unfortunately, because our income rose and our deductions fell, we owed more in taxes in 2009 than we did in 2008." This is true, but not unfortunate. We did lose enough of the mortgage interest deduction in 2009 that it was no longer advantageous to itemize our deductions (the standard deduction was higher). But overall, we reduced our expenses. I think it's important to consider the relationship between expenses and deductions on taxable income. Here's an explanation.

Our two largest deductable expenses over the past few years have been our mortgage interest payments and our state and local property taxes. These are out-of-pocket expenses which we pay in installments, but which cumulatively reduce the amount of money we have left to spend on everything else. The other expense which significantly reduces our income is our total US Income Tax due each year. This is roughly calculated by taking our income less any deductions and multiplying by a percentage (which gets progressively higher as each tier of our income exceeds certain thresholds). It's also paid in installments, in the form of withholding from our paychecks (and a lump sum due April 15 if our withholding was not sufficient). I've tried to express the total impact of these three expenses on our finances for 2008 and 2009 in the statements below, along with a few other bits of info, in an attempt to evaluate our progress last year.

  • Income: 2009 > 2008 (increase of 11%)
  • Mortgage Interest Payments (MI): 2009 < 2008 (decrease of 37%)
  • Property Taxes (PT): 2009 > 2008 (slight increase)
  • US Income Tax (UST): 2009 > 2008 (increase of 18%)
  • Total Interest and Tax Expense (MI + PT + UST): 2009 < 2008 (slight decrease)
I think the first and last points above are key. Our income was higher in 2009, but our total interest and tax expense was lower. I personally don't really care whether we're paying more (or less) money to our lender or to our government from one year to the next, as long as the total amount of money we part with continues to trend down.

This is more evidence to confirm my suspicion that the mortgage interest tax deduction is not the great benefit that some claim it to be. Hypothetically, it makes sense to me that it's not advantageous to pay interest on a debt so as to save 25 (or 28 or 33) percent on taxes. And after running the numbers in a real-life scenario, I can see that my assumption holds true. Our efforts to pay off our debt reduced our total interest and taxes in 2009. Projecting this into the future, I look forward to the year in which we pay zero mortgage interest -- not because I want to pay more taxes, but because I want to reduce our total expenditures as much as possible.

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