Taxes 2014, mortgage

There are only a few tax cuts available for individuals in Estonia. The three most common being the tax cut you get for having a child under the age of 18, for having paid some sorts of school fees or the tax cut you get on interest paid on your home loan.

The usefulness of this tax cut

Essentially the mortgage tax cut means that the interest you pay towards your mortgage is tax free, meaning you get back 21% (2014 income tax rate) from the government. This is essentially seen as a way for the government to help citizens in getting their own homes. I’m somewhat ambivalent on this tax cut. While it is of course nice, then it’s not really what will make it or break it if you’re actually looking into buying a home.

This tax cut is the one most likely to disappear as well, there’s been quite a lot of discussions about its usefulness in the media recently and well, the government needs money! I’m not really going to miss this cut when it disappears since it’s been reduced once already to limit its usefulness. Numbers wise, taking into account the tax return the effective interest rate of my mortgage is <2%, which is nice, but it being over 2% wouldn’t hurt much either.

Currently the cap of interest that’s tax free is 1920€. For my mortgage the interest payments for the year 2014 were 1200€, so we’re not even taking advantage of the full scale of the cut. Overall it comes to about 240€ in returned money, and that essentially covers the income tax I’d have to pay for my investments with a bit left over that’s going straight back into investments.

Social lending – why should you invest as a company?

Social lending is an easy way to invest, but sooner or later most investors come to the point where the idea of starting to invest under a company becomes interesting. (Mostly after you’ve paid your first bit of income tax and seen how much that is!)

As my portfolio has gotten bigger, I’ve started to consider investing as a company as well, since the amount of money you save on taxes is impressive.

Overall there are two main benefits and two main downsides and upsides of investing as a company:

Benefits:

– You can postpone paying taxes until you want to take out the money from your business in dividends. (Essentially pre-tax money gets to grow in peace.)

– You can charge off defaulted loans that are showing no recovery, thus lessening your tax burden even further.

Downsides:

– The way Bondora and others handle data reporting right now doesn’t work too well in terms of the info you need for accounting.

– There is no standard for how to report Bondora investments, finding a bookkeeper might be difficult and learning the reporting yourself might be time consuming.

Real numbers based on my portfolio

The numbers speak for themselves though, and Krista, who runs an accounting focused blog in Estonian calculated sample returns based off my portfolio, so that’s food for thought. Go look at the numbers to see the difference. (Spoiler: I’d have increased my earnings by more than 40% if I’d invested pre-tax earnings as a company.)

Early retirement – what to do about health care?

In addition to the big piles of money you have to stack up to be able to retire early, hands down the biggest issue is health care. You can’t just not live without healthcare but there are certain issues with keeping your access to health care services.

In many American blogs I see that they have the option to buy health insurance from many different insurance providers even when not working due to the way their health care system works. Estonia, however, like many other European countries has a universal coverage system where the state takes care of you as long as you’re a productive member of society – this is where the problem arises with early retirement – you’re not really technically a productive member of society anymore.

ehl

Conditions to be eligible for health insurance

Essentially in Estonia eligibility for healthcare is linked to whether or not social tax is being paid for you. There are two options for social tax being paid – it can be paid by your employer OR by the state.

The state pays your social tax if you’re unemployed and actively seeking a job (so not an option for early retirement), if you’re a university student (impractical to aim for that) and under a few other conditions that you’re unlikely to hit as a potential early retiree (like raising 7 kids).

Your employer pays your social tax if you’re working for them – not something you’re likely to keep doing as an early retiree. Social is 33% of your gross salary which is being paid by your employer. (13% for healthcare + 20% for retirement). There’s a minimum to be eligible for healthcare, so you can’t just work 1 hour a month and keep your rights to be insured.

How to be insured if you aren’t working?

While it’s possible to keep working part time and most people would (including me) because they want to be useful and they enjoy their work a moment should be taken to consider the option of not working or at least taking a temporary break when you’ve hit your retirement goals.

There are actually two options here. Firstly, you can become your own employer. This means incorporating some of your investments so that you’d have an LLC that you can use to pay your own salary. You could just pay yourself the minimum and take the rest our in dividends. (Depends on how interested you are in Estonian retirement schemes since they depend on your salary). This would likely bring several tax benefits as well because you can discount losses more easily as an LLC as opposed to an individual.

However, if you’re opposed to that idea, I was surprised to find that’s relatively easy to get optional insurance as well. For the year 2014 monthly cost for optional insurance was 123€ (it’s calculated off the average gross salary*0,13). You are eligible for the insurance contract if you’re a permanent resident in Estonia and have been insured by some other party (state or employer) for 12 months in the previous two years. I assume that condition is there to stop people from just migrating into the country to get health insurance.

In the long run the payment will probably go up as the average salary climbs up as well, but that is going to happen with your potential salary as well since that’s going to increase as well. I’d say it’s probably more reasonable to have an LLC and pay yourself a salary to get health insurance since at that point you’re likely to have enough investments that you should start thinking of tax advantages, but it’s good to know that you can get health insurance without much hassle if you decide to take a year off work for example to travel the world!