After phreaking out because I no longer have a job and Hubs gets paid a pidly teacher salary (what we owe is about how much he gets paid each month)! We decided not to file right away and I did some thinking. There is a deduction for contributing to a traditional IRA. So I did some math and I calculated that we could reduce the amount we owed the federal government to a much more manageable amount if we both maxed out our IRA contributions for the year.
|Random Photo of the Hallway Outside my Freshman Year Dorm Room|
I've has a lot of text heavy posts recently so I'm trying to include more pictures.
I had a number of misgivings about doing this. We have enough money saved to max out IRAs in our home down payment fund but we'd wipe out our downpayment savings. I also don't want to use traditional IRAs as retirement savings because I'll have to pay taxes on that money when I take it out in retirement and federal tax rates are at a record low. One the other hand, it makes a lot of sense though to pay our future selves $11,000 instead of paying the IRS $1770 today.
I also worry about our precarious economic situation. We only have one income right now so I'd like to have a large emergency fund and I thought of our downpayment fund as a back up for our regular emergency fund. If we need money from our IRA we'll have to pay taxes and a 10% penalty. But, while wandering the internet, I learned that there's an exception to the IRA withdrawal penalty for "first time" homebuyers. Hubs and I decided that opening IRAs and sticking our home downpayment money in the IRA for the time being seems okay.
I still have my misgivings. We'll have to pay taxes on the money when we withdraw it for a home even if we don't have to pay the penalty. Right now we're in the 25% bracket, we might move up to the 28% bracket when we're ready to own a home. I was worried we'd have to open an investment account for the IRA and I was hesitant to do that because I don't like investing when I might need the money soon the market is risky and volatile. Fortunately we were able to start savings account IRAs. Congress can could also change the tax code and remove this exception so that first time home buyers can no longer access their IRAs for the purpose of making a downpayment.
When I was in school I loved the gaming aspect of tax law but it's so much more stressful in real life. So, to keep this from happening again, Hubs has changed his withholding status so that the withholding is at the higher single rate, not the low married rate.
Please don't construe this blog entry as legal or tax advice. If you need tax help talk to a professional. If you have middling to low income the IRS has programs to help people get their taxes prepared. Every year I've done my taxes by myself I've made a mistake sometimes that mistake means I get more money than I thought sometimes it means I get less. I'm just explaining my frustration with my life situation this tax season.
Do you anticipate getting a refund this year? What will you do with it? Do you do your taxes yourself?