Monday, August 8, 2011
Keeping Your Income!
Since we've all been told there is a possibility of a credit rate interest hike, I think it's time we addressed a credit issue I found myself in a discussion over. I had noted that it was a stellar idea to pay off your mortgage as quickly as possible, that extra income could work marvels for one's financial outlook, when I was attacked by the committee of "they." I'm sure you've heard of them, that anonymous group that has no fruit on the tree to offer as evidence "they" have a clue about the opinions "they" offer. It seems that "they" have opined to the world that the tax implications of having a mortgage far outweighs the interest penalty folks pay for the privilege of borrowing money to own a home. This is absolute stinking financial thinking, let me show you why.....
First of all these numbers are fictitious but represent factual formulas. Let's say Bob, (again a fictitious individual), earns an income of $100,000.00 per year, and he is federally taxed at 35%. His tax burden for the year prior to deductions is $35,000.00. So Bob needs a place to live and obtains a mortgage that requires he pay $500.00 per month in interest, or $6000.00 a year. His tax burden isn't lowered by the $6000.00 per year, it's deducted from his gross income, then taxed. So his taxable income goes from $100,000.00 per year to $94,000.00 per year. Hence the taxes he pays goes from $35,000.00 per year to $32,900.00 per year. He paided the bank $6000.00 to get a return of $2100.00 from the I.R.S. If Bob had paid off the house he'd have an additional $3900.00 per year in his pocket. Write offs are not sound financial policies. While it's nice to have Uncle Sam send you a refund check, it's your money he took in the first place, and your only getting a portion back.
Here's another example...
Say your annual income was around $70,000.00. To erase all of your tax liabilities and get a refund check of approximately $7600.00 back, you'd have to spend $25,000.00 in taxable write-offs. Let's do the math $25,000.00 is greater than $7600.00, ($25,000.00>$7600.00). Those "tax write-offs" "they" say you need to combat the I.R.S. are actually better off as income in your pocket. It's a game you cannot win, the above individual is sacrificing $17,400.00 that could be cash in pocket.. Not to say you shouldn't use all of the legitimate deductions you can amass from everyday spending, but using a mortgage to cut tax liabilities, is throwing spendable income away. Pay off debt as quickly as possible, and avoid listening to anonymous financial advice.