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Tax Time

December 3rd, 2008 at 06:19 pm

December is a spendy month for many people, and it certainly is for us because it's the month property taxes are due. I generally pay our property taxes in early December, so today I wrote checks totaling a very tidy sum. This will take care of the first half of the property taxes. The second installments are due in April (CA) and June (ID).

I systematically save for property taxes since becoming my own impound manager a few years ago. (We carry a small mortgage on our CA home, otherwise this information would not be relevant.) There was a time the mortgage company managed the impounds (aka escrow account) but one day I realized that they usually take more then they need, and furthermore, they are earning interest on MY money. To manage the process, I created my own "impound reserve account" and deposit a prorated amount each month (it's an interest-earning savings). The prorated sum is the annual charge for taxes and insurance divided by 12. When it's time to pay the bills, I transfer funds to my checking account.

This strategy works for me because I'm disciplined enough to leave the funds untouched except for their intended purpose. I've known others who tried this method with disastrous results... they treated the impound account as an "emergency fund" rather than as encumbered money. If the money's not there when you need it, what's the point? Just let the lender manage it for you and be guaranteed its availability. Of course, you "pay" the lender for the service by letting them use your money for free.

The best part about taking control yourself: the interest this money earns for you adds up over time. For example, if you pay $6,000 a year in taxes (not unusual in CA), and make prorated deposits of $500 invested @ 2% compounded monthly, you will earn ~ $55. Keep in mind that the full $6,000 has not been in the account the entire year.

One caveat: stay on top of due dates because an inadvertent late payment will result in a fine, wiping out any earnings. This happened to me once when I was distracted by a particularly pressing issue at work, and I simply forgot. And what a dear price I paid for my oversight. So now I program due dates into my e-calendar to ensure a timely reminder.

Another point: if your mortgage includes PMI (mortgage insurance) because you have less than 20% equity, taking over your impound/escrow account is not an option.

3 Responses to “Tax Time”

  1. monkeymama Says:
    1228330491

    Yup. I just wrote my check - though I will probably mail next Monday. I pay that one from my savings account because it takes a long time to clear and so I may earn interest for a couple of more weeks after I mail it off. Big Grin
    I know too many mortgage companies who miss property tax payments and then ding their clients for the late fees. Ugh. I don't recommend mortgage impounds.

    Then again, I also know a lot of people who could not afford their property taxes if they didn't have to pay it in with their mortgage. So some are better off that way. But just another example where financial discipline pays off.

  2. Analise Says:
    1228331549

    monkeymama - you are so right about the pay-offs that come with financial discipline... this is just one example of how to use your hard-earned $$ to work for you but it requires discipline. Another is using CCs and paying off the full balance every month... advantage: your earn miles (or points) to use for travel, etc.

  3. scfr Says:
    1228332200

    When we had a house, we paid our own property taxes for the very reasons you mentioned.

    As you said, calendaring the due dates is critical. We got one bill a year, with 2 due dates (assume most places are the same). It's just like self-employment taxes. There are no "reminder notices" ... You have to take responsibility for getting them in on time.

    I agree that both systems (paying on your own or using an escrow account) have different advantages for different people.

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