Community Chat

[goodstuff]

On 1/5/2015 croemer said:

On 1/5/2015 GoodStuff said:

On 1/3/2015 Peaches McPhee said:

It is one thing to be debt free, but you have to recognize the need for a mortgage.

It takes some work and planning, but it's actually quite possible to become mortgage free as well. We haven't had any debt of any kind in many years, and recently retired totally debt free, including a paid-off house. A beautiful feeling!

I have heard that argument...*need for a mortgage* for several homes we have owned and I must say...being mortgage free has been the greatest feeling of all. JMO

So true. Some people talk about the tax breaks for mortgage interest as pivotal. Of course, if you have a mortgage you should take advantage of the tax breaks......but what you pay in principal and interest more than outweighs the tax benefit! I think having a mortgage is perfectly reasonable to enable one to purchase a home and build equity......but there's great advantage in paying it off ASAP and becoming debt free. You can accelerate a mortgage tremendously by paying off just a little extra interest each month.

[Qwackertoo]

here is an interesting but older, 2009, article on mortgage free vs. mortgage for the tax deduction. These numbers now would actually be WORSE, because you could get a mortgage for almost 1/2 the rate as listed in the example . . . so the house would have to be much more than the 200K as cited in the example.

The standard deduction

The 2009 standard deduction for married couples will be $11,400. That means in order to gain any benefit from tax deductions, your interest paid must exceed this number. In other words, you would have to pay $950 per month in mortgage interest (not principal) in order to see any tax benefit from your mortgage payment.

If you had a mortgage on a $200,000 house at 6.25%, you would be barely exceeding the standard deduction for the first few years, assuming the deduction never increases (which it usually does). After that, you would be better off taking the standard deduction assuming you receive no other deductions.

So, in reality, such a tax deduction would only be helpful in house purchases in which your mortgage is $200,000 or more. Anything else and it’s almost pointless.

J.D.’s note: As I usually do with articles like this, I asked my accountant for feedback. His response was: “This article seems accurate, but the author makes the assumption that an individual will only have mortgage interest to deduct when comparing to the standard deduction. Other items that are deductible include state income taxes, property taxes, and charitable donations.”

He also added: “You should not look at the tax savings as the reason to purchase a home. It is only one component, and a minor one at that.” Basically, he agrees with CJ.

A poor trade

If you do itemize deductions, you’re still paying more in interest than you’ll save on taxes. This is the second thing that people overlook.

If you are paying over $11,400 in interest, that does not mean that you are paying $11,400 less in taxes. It means that $11,400 of your income is not counted as taxable income.

Let’s say you’re in the 25% tax bracket. If you pay $20,000 in mortgage interest, it will save you $5,000 in taxes. $20,000 of your income does not count towards taxes. Effectively, you are paying $15,000 to get your tax deduction. This is not the most financially sound advice I’ve ever heard. If you take such advice, I’ve got a really good deal. I will pay you $33 in exchange for $100. That’s the same type of financial advice as someone telling you that keeping a mortgage is a good thing for tax reasons.

link to article:

http://www.getrichslowly.org/blog/2009/03/10/why-you-shouldnt-keep-a-mortgage-just-for-the-tax-deduc...

I didn't search further for an updated version with today's interest rates and today's tax standard deduction IF that has changed . . . I didn't look to see IF it is still 11,400 or not . . .

[croemer]

On 1/5/2015 Qwackertoo said:

here is an interesting but older, 2009, article on mortgage free vs. mortgage for the tax deduction. These numbers now would actually be WORSE, because you could get a mortgage for almost 1/2 the rate as listed in the example . . . so the house would have to be much more than the 200K as cited in the example.

The standard deduction

The 2009 standard deduction for married couples will be $11,400. That means in order to gain any benefit from tax deductions, your interest paid must exceed this number. In other words, you would have to pay $950 per month in mortgage interest (not principal) in order to see any tax benefit from your mortgage payment.

If you had a mortgage on a $200,000 house at 6.25%, you would be barely exceeding the standard deduction for the first few years, assuming the deduction never increases (which it usually does). After that, you would be better off taking the standard deduction assuming you receive no other deductions.

So, in reality, such a tax deduction would only be helpful in house purchases in which your mortgage is $200,000 or more. Anything else and it’s almost pointless.

J.D.’s note: As I usually do with articles like this, I asked my accountant for feedback. His response was: “This article seems accurate, but the author makes the assumption that an individual will only have mortgage interest to deduct when comparing to the standard deduction. Other items that are deductible include state income taxes, property taxes, and charitable donations.”

He also added: “You should not look at the tax savings as the reason to purchase a home. It is only one component, and a minor one at that.” Basically, he agrees with CJ.

A poor trade

If you do itemize deductions, you’re still paying more in interest than you’ll save on taxes. This is the second thing that people overlook.

If you are paying over $11,400 in interest, that does not mean that you are paying $11,400 less in taxes. It means that $11,400 of your income is not counted as taxable income.

Let’s say you’re in the 25% tax bracket. If you pay $20,000 in mortgage interest, it will save you $5,000 in taxes. $20,000 of your income does not count towards taxes. Effectively, you are paying $15,000 to get your tax deduction. This is not the most financially sound advice I’ve ever heard. If you take such advice, I’ve got a really good deal. I will pay you $33 in exchange for $100. That’s the same type of financial advice as someone telling you that keeping a mortgage is a good thing for tax reasons.

link to article:

http://www.getrichslowly.org/blog/2009/03/10/why-you-shouldnt-keep-a-mortgage-just-for-the-tax-deduc...

I didn't search further for an updated version with today's interest rates and today's tax standard deduction IF that has changed . . . I didn't look to see IF it is still 11,400 or not . . .

Great article...TY!

Goodstuff, we had mortgages and even with a tax break... our home being paid for is worth some peace of mind to us. I have no problem that most of us need a mortgage...but knowing we no longer have that dreaded payment each month has taken quite a bit of stress off us. We had a goal and paid the home off earlier than even we thought we would be able to do...by making extra payments. It was not fun having less income each month until we did so...but we kept in mind our goal...could not be happier...NOW.

[Kalli]

On 1/4/2015 winamac1 said:

On 1/3/2015 Kalli said:

We were debt free for a short time 6 years ago and hated the fact that we had no write-offs and had to pay more to Uncle Sam. So we went back in debt.

You have to spend money to make money. It's kind of like a Merry Go Round. Once you get on, you hate to get off because when you do, you're stagnant and not increasing your worth.

As long as DH is alive and feels well enough to continue working, we'll carry debt.

-Kalli

So you want to pay $1.00 and get .33 cents back?? I don't quite understand this? I'd rather have NO mortgage, no tax deduction and save my over .70 cents on the dollar.

No. I want to spend a dollar and get much more than a dollar back.

-Kalli

[winamac1]

On 1/5/2015 Kalli said:

On 1/4/2015 winamac1 said:

On 1/3/2015 Kalli said:

We were debt free for a short time 6 years ago and hated the fact that we had no write-offs and had to pay more to Uncle Sam. So we went back in debt.

You have to spend money to make money. It's kind of like a Merry Go Round. Once you get on, you hate to get off because when you do, you're stagnant and not increasing your worth.

As long as DH is alive and feels well enough to continue working, we'll carry debt.

-Kalli

So you want to pay $1.00 and get .33 cents back?? I don't quite understand this? I'd rather have NO mortgage, no tax deduction and save my over .70 cents on the dollar.

No. I want to spend a dollar and get much more than a dollar back.

-Kalli

Ummmm...that's not quite the way mortgage deductions work....

[glb613]

On 1/5/2015 Kalli said:

On 1/4/2015 winamac1 said:

On 1/3/2015 Kalli said:

We were debt free for a short time 6 years ago and hated the fact that we had no write-offs and had to pay more to Uncle Sam. So we went back in debt.

You have to spend money to make money. It's kind of like a Merry Go Round. Once you get on, you hate to get off because when you do, you're stagnant and not increasing your worth.

As long as DH is alive and feels well enough to continue working, we'll carry debt.

-Kalli

So you want to pay $1.00 and get .33 cents back?? I don't quite understand this? I'd rather have NO mortgage, no tax deduction and save my over .70 cents on the dollar.

No. I want to spend a dollar and get much more than a dollar back.

-Kalli

It's a terrible way to manage your money. Why would you want the government to have your money interest free? That is what happens when you get a tax refund.

[winamac1]

On 1/6/2015 glb613 said:

On 1/5/2015 Kalli said:

On 1/4/2015 winamac1 said:

On 1/3/2015 Kalli said:

We were debt free for a short time 6 years ago and hated the fact that we had no write-offs and had to pay more to Uncle Sam. So we went back in debt.

You have to spend money to make money. It's kind of like a Merry Go Round. Once you get on, you hate to get off because when you do, you're stagnant and not increasing your worth.

As long as DH is alive and feels well enough to continue working, we'll carry debt.

-Kalli

So you want to pay $1.00 and get .33 cents back?? I don't quite understand this? I'd rather have NO mortgage, no tax deduction and save my over .70 cents on the dollar.

No. I want to spend a dollar and get much more than a dollar back.

-Kalli

It's a terrible way to manage your money. Why would you want the government to have your money interest free? That is what happens when you get a tax refund.

Lol Ita. Why would I want a tax deduction of less than a third when I can make 2/3's more not giving govt. my money??????

[WenGirl42]

On 1/6/2015 winamac1 said:

On 1/6/2015 glb613 said:

On 1/5/2015 Kalli said:

On 1/4/2015 winamac1 said:

On 1/3/2015 Kalli said:

We were debt free for a short time 6 years ago and hated the fact that we had no write-offs and had to pay more to Uncle Sam. So we went back in debt.

You have to spend money to make money. It's kind of like a Merry Go Round. Once you get on, you hate to get off because when you do, you're stagnant and not increasing your worth.

As long as DH is alive and feels well enough to continue working, we'll carry debt.

-Kalli

So you want to pay $1.00 and get .33 cents back?? I don't quite understand this? I'd rather have NO mortgage, no tax deduction and save my over .70 cents on the dollar.

No. I want to spend a dollar and get much more than a dollar back.

-Kalli

It's a terrible way to manage your money. Why would you want the government to have your money interest free? That is what happens when you get a tax refund.

Lol Ita. Why would I want a tax deduction of less than a third when I can make 2/3's more not giving govt. my money??????

A tax refund isn't the same thing as a tax deduction. A tax deduction reduces your tax liability *so that* you give less of your money to the government

[glb613]

You are paying interest on a mortgage to get a tax deduction. I'd rather not have any debt and invest my money or contribute to my IRA.

[WenGirl42]

On 1/6/2015 glb613 said:

You are paying interest on a mortgage to get a tax deduction. I'd rather not have any debt and invest my money or contribute to my IRA.

I understand that, but it has nothing to do with getting a tax refund or not. If you do it right you're getting a higher return on your investment in your home than you're paying in interest, AND you're reducing your tax liability. Most people aren't doing it right (and I can't speak to whether Kalli is or not), but it's just a different investment strategy when it comes down to it.