| The advice to buy a house and never pay it off | | | | entire $11,215 they paid in interest. Instead of paying |
| because you need the tax deduction is financially | | | | $18,330 in federal income tax, they'll pay $15,525. |
| deadly for most home buyers. The tax deduction | | | | To determine whether the Rodriguezes-or you-would |
| might be worthwhile for 1-2%--the top earners in | | | | be better off with a mortgage and mortgage interest |
| America and similarly income-tax-structured countries. | | | | tax deduction or no mortgage and no mortgage |
| But the average Jane and John Doe need cash far | | | | interest tax deduction, we have to look at a true |
| more than they need the tax deduction. Here's why. | | | | measure of wealth: cashflow. Compare the results |
| The Tax Savings Myth | | | | from the following tables. |
| The main problem with spending money in order to | | | | Rodriguez -- Mortgage Holder Cashflow |
| save money is that you always have to spend much | | | | Mortgage holders who earn $100,000.00less mortgage |
| more than you save. "Thank you for shopping at | | | | payments of $12,069.36less federal tax payment of |
| Safeway; you saved $22.14 today." Whenever you | | | | $15,525.00 |
| save double digit dollars shopping, you've spent triple | | | | CASHFLOW ----------------> $72,405.64 |
| digit dollars! You understand that, right? | | | | You - Smart Non-Mortgage Holders Cashflow |
| Spending over $200 at the grocery store to save $30 | | | | Cash homebuyers earn $100,000.00less mortgage |
| is similar to deducting mortgage interest expense off | | | | payments of -0-less federal tax payment of |
| your U.S. Federal Tax Return. You spend a dollar on | | | | $18,330.00 |
| your home to save 30 cents (or whatever tax | | | | CASHFLOW ----------------> $81,670.00 |
| bracket you're in...28%, 30% 33%, 35%, 45%...) on the | | | | The family without a mortgage is $9,264.36 cash |
| tax deduction. | | | | ahead of the Rodriguezes--people holding a mortgage |
| It's challenging for the average person to compute, | | | | in order to claim a tax deduction. |
| because so many different taxes are deducted from | | | | According to these numbers off the 2005 U.S. Internal |
| your payroll checks. The rate on the Internal Revenue | | | | Revenue Service Tax Rate Schedules, folks with the |
| Service charts is just federal tax, only a small part of | | | | mortgage interest tax deduction reduce their tax bill by |
| overall taxation. All combined, as a general rule of | | | | only 2.8% of their gross income ($2805) via deducting |
| thumb, most upwardly mobile or successful United | | | | their home mortgage interest. (Other deductions and |
| States citizens are levied approximately 30 cents on | | | | dependents could change their tax liability, but this is an |
| the a dollar. In the case of tax deductions (an plan | | | | analysis only of how a mortgage affects savings). |
| most savvy Americans pursue), for every | | | | Conversely, the principle of "it's better to pay cash for |
| tax-deductible dollar you spend, you can avoid | | | | your home" does not always apply. If you have a very |
| approximately 30 cents in overall taxes. | | | | low interest rate on your home, and a high yield on |
| Here's an example. The Rodriguez family earns | | | | some stable investments, it could be better to carry a |
| $100,000 a year. For federal tax alone, they'll owe | | | | home loan. It depends upon your yield-income minus |
| $18,330 (besides all the other taxes: state, county, etc.). | | | | outgo. |
| Let's also say that their mortgage interest is $11,215. If | | | | However, buying a home on long-term monthly |
| they deduct the entire $11,215 interest from their | | | | payments just so you can get a tax deduction is, 98% |
| $100,000 income, their taxable income is $81,670, not | | | | of the time, the wrong reason to go into debt. |
| $100,000. Note, they deduct the interest off their | | | | And if you'd like to know how to get yourself into the |
| taxable income, not off their owed taxes. That's why | | | | positive cashflow position of owning your home free |
| the savings is not dollar-for-dollar. | | | | and clear years sooner, try one or more of the early |
| The difference between the tax on $100,000 and the | | | | mortgage payoff strategies available today, such as |
| tax on $81,670 is about $3000. Therefore, the | | | | the numerous ones outlined and compared in Let Your |
| Rodriguezes will save $3000 on their taxes, not the | | | | Mortgage Make You Rich. |