Friday, October 21, 2011

George Mindling Column 7-22-2005

Many Retirees Face Property Tax Crunch

Retirees trying to cope with dwindling income and spiraling expenses have always had to adjust lifestyles to balance their budgets. Increases in property taxes are never offset by increases in retirement income, even when the Save our Homes three percent cap in property tax increases applies!

Many retirees own their homes outright. They pay only insurance premiums and the annual property taxes on their homes. After years of mortgages, where PITI (Principal, Interest, Taxes and Insurance) were withheld from payments automatically, many now find the annual property tax a lump payment that becomes the largest single expenditure of the year. When they were paying a mortgage, the tax amount came out of the mortgage payment and the property tax was paid by the mortgage holder out of an escrow account. The effect was the homeowner being separated from the actual responsibility of paying the property tax. No checks had to be written, no withdrawals from savings to cover taxes.

Now the retirees themselves must handle those payments. Sometimes it can be overpowering and finances can get out of hand. Savings accounts are often used for these lump sum payments, and nothing is more distressing than watching savings melt away. Even if you make monthly deposits to offset the quarterly or annual payments, it’s difficult to watch your funds take that big dip every year. For many, saving part of every social security or retirement check just for taxes hasn’t been considered.
One way to avoid the annual shock is to create your own escrow account. Use it only to pay taxes and leave your savings account alone. Most banks offer free additional savings accounts, and you can use it anyway you want.

If you are still working and paying estimated taxes, as most self-employed and many part time workers do, you pay the equivalent what would have been withheld from normal wages every three months. You may also want to consider an escrow or tax account. Many people have no problem putting part of every check into savings to cover the quarterly tax expense, but savings accounts often fail to grow to cover both needs: quarterly and annual withdrawals, plus saving for other future money needs. Separating the money into two separate accounts makes it easier to control and plan.

You know how much estimated taxes will be before hand, so deposit one third of the amount you owe in the escrow account each month. Make a habit of monthly deposits and you will always be covered at tax time. Retirees can do the same with the property taxes. Divide the annual amount by twelve and deposit that amount into the escrow account every month as well. Pay your tax amounts first, then put whatever you can spare into savings and leave it alone.

It doesn’t matter which account you save into. It just feels better knowing the savings or checking account isn’t taking a beating every time you pay taxes.

George Mindling

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