Building Savings, Not Buying House for Tax Break, May Be Best for 25-Year-Old

Q: I’m 25 and would like to purchase a home in a year to get the tax write-off, but I am having a difficult time saving money for the down payment.

Since I am in sales, my income varies from month to month, and my company treats my commission check (paid monthly) as a bonus taxed at 41%. My commission ranges from $2,500 to $5,500 monthly.

I also earn a salary paid biweekly that is already in the lowest tax bracket (approximately $24,000 annually).

I don’t have a lot of expenses ($350 rent, $350 car payment, $250 student loan repayment, $150 utilities and $200 credit card payment).

It would seem easy to save money, but I am having such a difficult time! What can I do to get taxed less so I can use that money to invest, instead of the government holding on to it until tax time?

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A: Whew, take a breath, girl! You’re trying to ride off madly in all directions. Let’s take first things first.

Don’t buy a house just because you want a tax break. At your income level, you’d be spending $1 in order to save less than 40 cents in taxes. Unless you’re sure you want to stay put for at least three years (better still, at least five years) and you’re positive you can afford all the incidental costs of home ownership--taxes, insurance, repairs, maintenance, improvements--concentrate on building up your savings instead.

At 25 and with few expenses, you’re in a perfect position to get a really good head start on your retirement savings. Soon enough, other expenses will come along that make saving tougher. Right now you can put aside money that can grow for you for the rest of your life.

Here’s an example of how an early start can pay off: Say you put aside just $2,500 a year from now until you’re 35, and then stop saving altogether. At 65, you could have nearly $700,000, assuming an average 10% annual return. If you wait 10 years to begin investing, you would have to save more than $4,225 a year, every year, for 30 years to get the same nest egg.

You also may be confused about how tax brackets work. You only have one tax bracket annually, and you can change your withholding over the course of the year to make sure you don’t owe too much or get too big a refund the following April. Get with a professional tax preparer who can review your withholding and offer suggestions about the best way to fill out your W-4 tax withholding form so the maximum amount stays in your pocket.

The pro may be able to spot other ways you can save on taxes too. That might include buying a house, or it might not. Maximizing your 401(k) contributions, however, will both reduce your tax bill and jump-start your retirement savings; you might consider a Roth IRA as well, since the withdrawals in retirement would be tax-free.

Then start keeping a daily diary of every dime you spend. You’ll find out pretty quickly where the money is going, and then you can start making adjustments.

Now, as for that $200 for credit cards--that’s your total bill each month, correct? Not just the minimum payment? Because smart cookies don’t carry a credit card balance. Before you start saving for a house, or for anything other than retirement, make sure that debt is paid off.

Over Limit and Over a Barrel

Q: My credit card company recently approved a purchase I made that put my balance over my credit limit. I didn’t realize that the company would do that--I thought the purchase would be rejected if it was over the limit.

The company charged me a $29 “over limit” fee and refuses to drop it; the phone representative said approving over-limit purchases is a service they offer to their customers.

I believe this is a deceptive practice designed to raise fees and that it was unfair for them to willfully approve the purchase knowing that it would result in a fee.

What do you think?

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A: I think you’re stuck paying the charge.

But there’s a way to get even: Pay off your credit card completely and never, ever, carry another balance. Pay each bill as soon as it arrives, and keep track of all your credit card purchases in a section of your checkbook register, so you never even come close to the limit.

This will deprive your credit card company of lucrative interest payments, late fees and over-limit fees. Instead of being a profit center for the company, you’ll be a dreaded convenience user--able to take ‘em or leave ‘em. They hate that.

Meanwhile, you’ll be keeping a heck of a lot more money in your own pocket, which is much nicer than spending it to make a credit card company rich.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.