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Interest Payments

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It’s that time of year again….TAX time!!!

Maybe some think of it as a “fun” time of year, particularly if you are expecting a refund (in which case…why are you doing that?? You’re essentially loaning the government money interest-free for a period of time! Change your withholdings so you end up with a smaller return. That means you’ll get more money in each paycheck!)

For our little family of entrepreneurs (him) and contract workers (me), this time of year isn’t so fun.

We pay estimated quarterly taxes, but last year we had underestimated our taxes and ended up owing a bit when April rolled around. This year, I fear the same thing may have happened. We haven’t finished taxes yet so I don’t know for sure, but I’m a little nervous of the bill we may find ourselves facing. We’ll see. *fingers crossed*

Relatedly, because I’ve started gathering the relevant documents, I’ve seen how much INTEREST we’ve paid this year and it is sickening!

Between student loans, the car loan, and the credit cards (note:  we no longer have credit card debt at this point, but before they were paid in full we did accumulate some interest from them at the beginning of 2014), we ended up paying a total of $5988.95 in interest.

Can you believe it? That’s sooooo much money to be simply giving someone in exchange for them lending us money. It sickens me as I think of all the things we could do with $6,000!

Perhaps not surprisingly, the majority of the interest came from the student loans (just over $3,000), the rest came from the car loan (a little less than $2500) and credit card debt (remaining).

I know you can deduct interest payments for tax purposes*, so that’s what we’re planning to do. Still, I’d much rather pay taxes on that $6,000 of income and get to keep the money in my pocket rather than paying it out as interest. Booo!!!!

Have you started figuring out tax stuff yet? Do you get a refund? How much did you pay in interest last year?

*I should mention that I know next to NOTHING about tax preparation, as I never do my own. Sooooo, don’t take anything I say about taxes as a 100% fact without double-checking for yourself : )


22 Comments

  • Reply Mrs. H |

    Clarification: you can deduct SOME kinds of interest on your taxes. Mortgage and student loan interest for example. Not consumer debt like car loans or credit cards. And there are income levels at which the deduction phases out for student loans.

    • Reply Ashley |

      See? This is what I’m saying! I know very little about tax preparation! Sucks I can’t write off consumer debt interest, but it makes sense too. Good to know!

  • Reply Laura |

    Ms h is right. Also not sure if you know this but you can deduct part of your childcare expenses

    • Reply Ashley |

      Oh, yes! Thanks for the reminder about the childcare expenses!! Our preschool provides tax forms on request and its reminded me that I need to go pick ours up!!!

  • Reply Jerome |

    Yep, started preparing taxes. To answer your questions: we pay no interest as we have no loans, and we will get a large refund.
    You are absolutely right that it is loaning money to the government. But money-matters are never black and white. This loaning to the government allows me to invest a nice chunk of money which I do not need for anything else. I know that with a bit of self-discipline I would have been able to save more, but I know from myself that I do not alway have the necessary amount of self-disciplin. And so I opt for the high refund. Knowing your own weaknesses and finding solutions for them has been very important for us with regard to our finances.

    • Reply Ashley |

      So, so true! money matters are NEVER a simple black and white! You have to do what works for you and if the process works for you, that’s all that matters!

  • Reply Anonymous |

    You absolutely must stop the bleeding on some of that interest! I know you have been all about “wins” in your debt pay-off, but you are at the point where you need to seriously look at the interest rates and shift more to paying off higher interest loans. Your auto loan and license fees interest rates are quite reasonable. (I’m not sure if you have been paying extra on you car loan.) For starters, I would pay the absolute minimum on the license fees (as much as you want them obliterated!) and pour more into your student loans.

    • Reply Meghan |

      Anon-

      Ashley has stated her reasons for wiping out the car loan several times; the gist of it being that if they ever have a financial emergency due to loss of work, etc. her car can be repossessed, the doctoral degree not so much. As they have actually had this occur, when her husband was sick with a mystery illness, it is not entirely an impossibility. (Also, if you run into financial hardship, federal student loans are able to go into forbearance, not as much with the car loan.) While many financial advisers do recommend tackling the highest interest rates first, and I am not disagreeing with you, this discussion has been tackled more than once and the car has been determined to be wiped out first, then the order of other debts is open to discussion (highest interest rate, lowest balance, etc.)

      Cheers!

      -Meghan

  • Reply Gwen |

    I’m married to a CPA with a master’s degree in Tax, so he takes care of everything and is good at minimizing the amount we owe Uncle Sam. We have a small car loan (7k) a mortgage (142k) and student loans (48k) and occasionally used credit cards. Last year we paid 10,541 dollars in interest. That number will go down in future years, but ouch!

  • Reply Nsheils |

    I paid $19k in student loan interest in 2013, so it wasn’t as much of a punch in the face to see my $12k in 2014. I will be so happy to see my 2015 tax info, which should only be about $4k in interest paid.

    • Reply Ashley |

      Wow, that’s a huge difference! You must be kicking butt with paying off the loan! Great job!

      • Reply Nsheils |

        It’s been a bit crazy! 80% of my salary goes toward my grad school loans. I can’t wait until we can turn that into savings.

  • Reply debtor |

    as someone else stated, you can only deduct your student loan interest – not the car or credit card.

    also, the deduction for student loans gets phased out as your income rises so make sure you check out those limits. I would definitely get more aggressive on those student loan payments if you can this year. Hopefully, you penalty-proof yourself when you pay your estimated taxes so you don’t have to pay penalties and interest even if you are underpaid

  • Reply SAK |

    You need to see an accountant to see what you can deduct. You general can’t deduct interest except mortgage and student loans (if under income limit). Some car costs may be deductible from personal taxes (likely on a mileage basis). I’m assuming DH’s truck gets dealt with under his company’s taxes. A fraction of all housing expenses (rent, utilities, etc) are deductible because of your home office. I’m not an accountant – don’t rely on this. But I own a small company – you really need to find an accountant that does small business/self employed taxes. Completely worth the money.

    • Reply Ashley |

      Thanks for the tips! I didn’t even think about deductions due to the home office situation!!!

      • Reply Mia |

        When I worked independently as a house cleaner while in college in the early 1980’s, I wrote off a new vacuum cleaner, my mileage, etc and filed on my own (no tax preparer).

        This year I think, after you 1st seek expert advise, you might want to keep separate track of everything you use for work… pens, paper, printer ink, new office chair, whatever. In case of an audit, I’d also keep loose track of how many hours you spend in your home office

  • Reply Anonymous |

    “That’s sooo much money to simply be giving someone….” Yes, indeed it is and Ashley could be doing something more about this. Her license fees are at 2.5% interest, and she has some student loans at as much as 8.25% interest. There is no reason why more of the license fees cannot be directed toward student loans, even if Ashley will not direct money from the auto loan.

    “Wins” are not wins if you are racking up needless interest. I have paid zero interest on anything in the last two years. It has not been easy for hubby and me to reach this point of paying down a modest mortgage, a car loan and a boatload of student debt. (Years I might add, and we have three children.) But if Ashley continues to ignores the entire interest rate scenario, there will be more money simply flushed down the toilet. We saved a fortune in interest rates because we looked at the hard facts first.

    • Reply emmi |

      I agree with your analysis, except that the other hard fact is you can’t pay down debt if you don’t stay motivated.

      • Reply Financial Fan |

        Yes, paying off debt is never, ever going to be easy. It is not for sissies! I do believe, though, that there is too much emphasis on the Dave Ramsey, feel good method. There’s nothing wrong with the get tough, avalanche method to avoid needless interest.

  • Reply Angie |

    Just don’t ever add together the total amount of interest you have paid on loans from the beginning of time. That is the most motivating yet depressing number! We’ve paid enough in interest on student loans and car payments to pay for a small house in cash. And we still have 50k left of principal to pay!

  • Reply Jordan Dane |

    Interest rates literally put you further in debt even when you’ve paid it. I had to get a service to help me get rid of the remainder of my car loan.

So, what do you think ?