This year, we are going to get absolutely killed in taxes. There are a few factors, mostly out of our control, and mostly unavoidable, but it's happening. If you are a religious school teacher or a landlord (or like us, both), you'll want to know these issues before you make some decisions.
Teaching - Year Two
Based on what I can tell, teachers make more from January through July than from July through December. OK, it's probably really August to August, and that's where the confusion was. Part of it was that Lisa's school skipped her first check and issued it at the end. But nothing really explains the several thousand dollar difference to me. The problem isn't the amounts, really, but we made a choice to not have any federal money withheld at Lisa's previous job, which means that her increase in income from the first several months to the second, and the fact that the second is only withholding some, means that she suddenly owes thousands more in taxes than last year. Part of last year's taxes included work at a normal job, too, so all those taxes were withheld. Basically, if you are a minister/school teacher in your second year of owing taxes because your school doesn't pay them for you, then be ready. We take a housing allowance, but that does not totally get us out of taxes, so we got smacked on this one. Looking back, I don't think we really had the money to save for this anyhow, but we'll know more about the budgeting necessary for next year now, and we're at least getting some of her pay withheld at this point.
My first year of being a landlord didn't result in making any money. I had a tenant move in from September on, and I also had some repairs to make, so that left me with a few hundred dollars. The second year, however, was more lucrative, and it meant that I made enough investing to take away our Earned Income Credit for the kids. If you make more than a few thousand dollars off an investment, then you owe more than other people with kids. This seems set up to nail people with large investment portfolios trying to get out of paying taxes, not a family struggling to get by that has chosen renting a house out to supplement the income. Since my wife is a minister and uses a housing allowance, our household income is fairly low, but it's all negated because I happen to rent a house for some side income. I guess my advice for church workers with young kids would be to avoid renting a house out if you can. It's really a seemingly great opportunity for us, but it's adding about $1000 in taxes we would not owe if we didn't rent, and that's on top of what I do owe for rental income. I think this counts for other investment income, too, so other people with other kinds of investments could get nailed. Basically, it hurts those of us who used to make more and could invest and now make less, and would like to live off the investment.
Death and Taxes
I know I'll have to pay the taxes, somehow. And I know we'll have to adjust our lifestyle slightly now that I see where we'll be at for taxes in the future. I looked it up, and we can't use the tuition we have to pay as a credit or deduction, so Lisa basically just gives 1/6th of her salary back to her employer, and we get taxed on earning that money. Now, here are some tips to Lutheran schools trying to make life easier for teachers: if you're going to charge tuition, maybe make a portion of it count towards childcare (tax credit). The other option would be to decrease the pay by that much and then it's not taxable income. Anything to make it so your teachers aren't scraping together several thousand dollars around tax time. My advice for investment income would be for the tax code to stop punishing people with less than a living wage in investments who also have kids and low income. Tax the income, fine, but don't take away a tax break designed for people with less income just because some of that income is derived from investments.
After I went through my expenses, and you'll have more of them than you think when you rent a property, I was able to get the income from the property down to where it needed to be to take advantage of the kid tax credit. That's partially because of a major repair that was needed, as well as the travel necessary to see to things in another state. However, I don't think the current year will work out this way, since rent went up and I'm hoping NOT to have another big repair. Or am I? Basically, a $3,000 repair saves me $3,000 in taxes if I don't make enough on the investment to lose out on the child credit. Granted, it can't be to improve the property, so if I go and replace windows to make the property worth more, that's not eligible. Anyhow, we dodged a bullet this year that we'll be ready for next year.