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Property Tax Update
Oct. 26th, 2011 10:37 pmEstimate check
My property tax bill came today, so now I get to see how well my estimate is working out for me.
Trying to be conservative, I decided to use my lender's method of saving the amount for last year's taxes plus an extra 1/6. That estimate came to $3935.21, and my actual taxes are (drumroll!) (oh, wait, is this not exciting enough for a drumroll?) $3467. I get to save $468.21 for next year's buffer. Victory is mine!
Now's a good time to evaluate all my strategies for the estimate.
1) Lender method = last year's amount x 1 1/6: 13.5% overestimate.
2) Trend method = choose a conservative estimate based on trends and multiply last year's amount by 12%: 8.9% overestimate.
3) County's mid-year estimate + 1%: 1.8% underestimate
I'm going to stick with the lender method. Using that, for next year I will save $337.13/month, only $10/month more than this year. And I have a plan for that buffer money, but I'll get to that later.
Payment method choice
So the next question is what is the cheapest payment method? Here are the choices I've been wondering about, from most expensive to least expensive:
A) Wait until after January 31 next year to pay = amount + 6% penalty + additional 1% penalty for each additional month late + interest of 1% per month. Hmm, they're a bit paranoid about cash flow, eh?
B) Pay online or by phone with my rewards credit card = amount - 1% reward + 3% convenience fee
C) Pay by check through the mail = amount + stamp
D) Pay by check at the drop box or by check or cash in person = amount
So, no discounts for paying early and no excitement about getting to use my rewards card.
Payment timing choice
Obviously I want my payment in by January 31. But I could also try that thing where I don't pay my taxes until January this time and then I take the standard deduction on my income taxes. Then I pay before January next year and itemize (with twice as much property tax deductions as usual).
I figured out that given my current trends in income, housing deductions, and charitable contributions, if I don't have property taxes it's better to take the standard deduction and if I do it's better to itemize, so using the itemize-every-other-year strategy, I would save a couple/three hundred dollars every two years.
But those trends might change. Probably not, but one of the following might conceivably happen:
a) They could stop letting us deduct sales tax--this would not change which strategy would be best.
b) I might make much less money than I'm making now due to quitting or going to half-time or something like that. If so, my marginal tax rate might go down. If so, it's better to take the deduction this year at my higher level, though not quite as much better than if I don't and my income is the same (more like one to two hundred dollars).
c) I could marry some guy who makes more than me. Then my marginal tax rate would go up. (I'm still in the 15% tax bracket, but I'm pretty close to the next one. The guy I have in mind makes more than me and has fewer deductions, so even without any marriage penalty, we'd probably still be in the next bracket.) In this case it would be better to wait.
d) I could get a higher-paying job. Ha!
Stupid real-life math with having to guess all the variables. Hmm, doing more research, even going to half time would not drop me below the 15% marginal rate.
Lien on my property
But check out this wonderful paragraph, the very first paragraph in my tax statement:
"State law AUTOMATICALLY places a tax lien on property on January 1 of each year to insure that taxes are paid. The lien remains on the property until the tax, penalties, and other charges are PAID IN FULL. ..."
That can't be good. Should I really be asking for that? It's one thing to risk paying a crazy amount of penalties and interest for paying taxes late, but it's quite another to risk your whole paid off house with all your stuff in it. Of course the property tax people are usually quite on the ball and don't lose payments, certainly not repeatedly. But surely things don't always work out so perfectly.
Buffer strategy
So I'm thinking I should start an emergency fund to make sure I can always pay my property taxes. Ideally, I would invest enough money that the interest would be enough to pay the taxes forever. Increasing interest to pay the increasing taxes. (Wait, how do you get increasing interest?) Okay, increasing dividends. Assuming a dividend yield of 3%, I'd only have to save $134,828. Hmm, suddenly my $468 buffer doesn't look so thrilling.
Plan B - put my savings into a one-year CD. Each year when it renews, add the extra buffer (if any), or take some out if there's an emergency. This year's CD rates stink, but I-bond interest rates are okay for the next year, so I could get an I-bond.
And I'm going to save 1/5 more than this year's taxes instead of 1/6 more to make it even more likely that there will be extra to roll into my CD next year.
My property tax bill came today, so now I get to see how well my estimate is working out for me.
Trying to be conservative, I decided to use my lender's method of saving the amount for last year's taxes plus an extra 1/6. That estimate came to $3935.21, and my actual taxes are (drumroll!) (oh, wait, is this not exciting enough for a drumroll?) $3467. I get to save $468.21 for next year's buffer. Victory is mine!
Now's a good time to evaluate all my strategies for the estimate.
1) Lender method = last year's amount x 1 1/6: 13.5% overestimate.
2) Trend method = choose a conservative estimate based on trends and multiply last year's amount by 12%: 8.9% overestimate.
3) County's mid-year estimate + 1%: 1.8% underestimate
I'm going to stick with the lender method. Using that, for next year I will save $337.13/month, only $10/month more than this year. And I have a plan for that buffer money, but I'll get to that later.
Payment method choice
So the next question is what is the cheapest payment method? Here are the choices I've been wondering about, from most expensive to least expensive:
A) Wait until after January 31 next year to pay = amount + 6% penalty + additional 1% penalty for each additional month late + interest of 1% per month. Hmm, they're a bit paranoid about cash flow, eh?
B) Pay online or by phone with my rewards credit card = amount - 1% reward + 3% convenience fee
C) Pay by check through the mail = amount + stamp
D) Pay by check at the drop box or by check or cash in person = amount
So, no discounts for paying early and no excitement about getting to use my rewards card.
Payment timing choice
Obviously I want my payment in by January 31. But I could also try that thing where I don't pay my taxes until January this time and then I take the standard deduction on my income taxes. Then I pay before January next year and itemize (with twice as much property tax deductions as usual).
I figured out that given my current trends in income, housing deductions, and charitable contributions, if I don't have property taxes it's better to take the standard deduction and if I do it's better to itemize, so using the itemize-every-other-year strategy, I would save a couple/three hundred dollars every two years.
But those trends might change. Probably not, but one of the following might conceivably happen:
a) They could stop letting us deduct sales tax--this would not change which strategy would be best.
b) I might make much less money than I'm making now due to quitting or going to half-time or something like that. If so, my marginal tax rate might go down. If so, it's better to take the deduction this year at my higher level, though not quite as much better than if I don't and my income is the same (more like one to two hundred dollars).
c) I could marry some guy who makes more than me. Then my marginal tax rate would go up. (I'm still in the 15% tax bracket, but I'm pretty close to the next one. The guy I have in mind makes more than me and has fewer deductions, so even without any marriage penalty, we'd probably still be in the next bracket.) In this case it would be better to wait.
d) I could get a higher-paying job. Ha!
Stupid real-life math with having to guess all the variables. Hmm, doing more research, even going to half time would not drop me below the 15% marginal rate.
Lien on my property
But check out this wonderful paragraph, the very first paragraph in my tax statement:
"State law AUTOMATICALLY places a tax lien on property on January 1 of each year to insure that taxes are paid. The lien remains on the property until the tax, penalties, and other charges are PAID IN FULL. ..."
That can't be good. Should I really be asking for that? It's one thing to risk paying a crazy amount of penalties and interest for paying taxes late, but it's quite another to risk your whole paid off house with all your stuff in it. Of course the property tax people are usually quite on the ball and don't lose payments, certainly not repeatedly. But surely things don't always work out so perfectly.
Buffer strategy
So I'm thinking I should start an emergency fund to make sure I can always pay my property taxes. Ideally, I would invest enough money that the interest would be enough to pay the taxes forever. Increasing interest to pay the increasing taxes. (Wait, how do you get increasing interest?) Okay, increasing dividends. Assuming a dividend yield of 3%, I'd only have to save $134,828. Hmm, suddenly my $468 buffer doesn't look so thrilling.
Plan B - put my savings into a one-year CD. Each year when it renews, add the extra buffer (if any), or take some out if there's an emergency. This year's CD rates stink, but I-bond interest rates are okay for the next year, so I could get an I-bond.
And I'm going to save 1/5 more than this year's taxes instead of 1/6 more to make it even more likely that there will be extra to roll into my CD next year.