Last year, Charles and Gloria were giddy with happiness.  Finally, after struggling for over a year with the loan modification process, they had been approved.

The modification would save them $700/month on their note, which equals $8,400/year.

Shortly thereafter, they received more good news!  Their property tax bill was being reduced $150/month or $1,800/year.  The county had re-assessed their home and the value of their home had dropped.

This was all good news… but a new problem was brewing.

Charles and Gloria now had an additional $850/month or $10,200 to work with.  What they didn’t have now was the tax write-off that went with the mortgage interest and the property taxes!

At our tax appointment, we discovered that they were in the 20% tax bracket.  As a result, their tax liability was $2,040 higher than usual because of the mortgage interest and property tax savings.   This was a major surprise to them.  They were still getting a refund but not as much as they had planned on.

Charles and Gloria were blessed that they did not end up owing taxes.  Many other families may not be so blessed.

So what should you do – Depending on your situation, here are 4 solutions

1. Adjust your withholdings down to pay more taxes in during the year.
2. Put more money into your 401k or 403b plan if you can
3. Save 20%-25% of the new income to cover your taxes
4. Some combination of all 3.

Hopefully you’ve found this helpful.

If you have any questions, please feel free to call me at 240-356-5050 or if you have any relevant comments on this blog, please feel to comment.