Hello all! I have a friend who wants to buy a house for the first time this year. She is planning on telling her employer not to take out any taxes for a few months so she can save up additional money for a down payment. She says that she can probably make up the taxes that she will owe from the deductions of the new house.
Is this possible? Is this a wise-move?
These are the type morons that are now claiming the mean mortgage company took advantage of them and they need the taxpayers to bail them out. Of course it is idiotic.
I don't know that I'd be so harsh. She should look at her taxes for this year to plan ahead. She should have some idea of the property tax and mortgage interest for 2008, as well as her state tax and charitable deductions. These cover most of the common schedule A deductions. I'd then suggest adjusting her withholdings (W4) only enough to get close to zero owed or refunded for this year. If she makes no adjustments when she buys the house, she's likely to get a large refund, lending uncle Sam some money. If she can't buy the house without the borrowing from her taxes due, she cannot afford the house and should get very frugal to save up. Not to pick your wording apart, but "probably make up the taxes" doesn't sound too confident to me. She should leave the closing in a strong position, not a month or two away from bankruptcy if she has some emergency. Joe
I think this may well be a good idea -- not withstanding the contrary opinion. The person may have some mortgage points being paid that would reduce the income tax if the person itemizes. Also, she should then have the withholding increased later in the year to mostly make up for the missed withholding. If the withholding is insufficient, there is interest penalty to be paid, but it's not nearly as bad as credit card interest.
Assuming the house makes sense otherwise, I think this would be the right time of the year for that to work nicely.
Remember the later in the year she waits to buy is that much smaller of a deduction for mortgage interest and property tax that you can get from the house.
Consider cutting back elsewhere with personal spending to create that savings.
Of course, if she anticipates a large refund this year (because she got a large refund this year) then change her withholding accordingly to have less withheld should be part of her plan to generate the savings necessary for a downpayment.
This is what I meant to imply. She should do a rough run of 2008 (not
07) tax year. That will tell her the impact for the partial year she will have those other items (The points, if any, mort interest, property tax). Once she has a closing date, those numbers are easy to find, and should help her adjust the W4 for the rest of 08. Of course, the impact will be small, if any, as we get toward the end of the year. Joe
And the people buying the house they could not afford with an ARM were sure their income would rise to meet the increasing payments when the rate adjusted or some other magical thing would happen.
Will her house payments be the same as she pays for housing now? Because it will take quite a payment to include enough benefits to cover her taxes not withheld. If she takes the standard deduction now, you will have to surpass that before the first dollar of benefit. And thern take into account only a few months of benefit.
If the house payments are higher, how will she make those. Will she be making a higher payment out of the same tax benefits she will be paying back taxes out of?
I'm just sayin.
Mike - if she does the planning/forecasting I suggest, she will be better informed. Since she offered no numbers, we do not know. She may be only a dollar away from looking to itemize, or she may live in a state with no income tax and realize, as you imply, that the house provides nearly no write-off. The stunt which was the original question needs to be looked at carefully as it may very well be as stupid as you stated. OTOH, she may be married (we do not know) and earning enough so she's already beyond the STD deduction. It sounds like that's not the case, and I lean toward guessing that you are right on target. The visit with TurboTax should prove it, either way. She may be in for a rude awakening. Joe
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