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Sunday, October 9, 2011

Your Mortgage Interest Deduction Isn't as Great a Tax Savings as "They" Claim

I will pay $4,320 in mortgage interest this year. 

And it will only save me $60 in Taxes.

The tax savings touted for mortgage interest is a terrible myth -- one of those that also convinces us it's okay to buy bigger houses and helped get us into this housing mess.


Yet financial gurus like Ric Edelman in his latest book  "The Truth About Money," try to mitigate the pain of paying mortgage interest each year by saying "oh, you really aren't paying all that much interest -- because you are saving 25% of it in taxes, if you are in the 25% bracket and itemizing on schedule A."  

In real life, this is ot necessarily true and certainly not true for a lot of single people!  You must do at least a simple analysis (see example below) before you really know.   I used Quicken and the IRS tables for back-up and checking.  You can do the same in about an hour and if you don't have Quicken, the IRS 2011 tax tables will do.

Even if you file as a single person - one of the least favorable tax statuses --  you can get a standard deduction of $5,800.  You don't need mortgage interest and schedule A itemizing to get that deduction

Standard Deduction Table for 2011 rates can be found here or on http://www.irs.gov. 


Templates for Comparison
  (using Quicken 2010 Tax Planner software)

My 2011 Taxes Using Standard Deduction Only

Adjusted Gross Income             $56,364
Standard Deduction                     $5,800
Exemptions                                  $3,650
Taxable Income                          $45,695
Taxes owed =                             $7,605
(with Schedule A - itemizing mortgage) 

My 2011 Taxes Using Schedule A Deductions

Adjusted Gross Income     $56,364

Itemizing Schedule A 
     Mortgage Interest                    $4,320
     Real Estate Taxes                        $780
     State Taxes                              $1,861
     Charitable Deductions                 $250
Exemptions                              $3,650

Taxable Income                         $45,495
    Taxes Owed                             $7,555*

If you have a jumbo mortgage and a whole lot more interest on your loan each year than I do, I can see why you would spend time focusing on how your tax bill isn't quite as large as it might be.  But for those of us who are single and scaled down in terms of housing needs and debt -- this argument for borrowing money on a mortgage is downright wrong. 
         
*Based on 2010 tax tables.

Monday, June 6, 2011

Mint Wins with the Envelopes Method

Hallelujah!  Mint.com has edged out Quicken with a new budgeting development in the software -- the ability to track expenses a la the Envelope method.  I'm freed from the Quicken annual subscription fee shackles ...and you could be too!

I've been comparing Quicken and Mint for some time and reporting about it on this blog.  Just recently I noticed a Mint upgrade that promised to "roll over" a monthly budget category, so I tested it for the month of May, 2011.  

As you may know, the Envelope budgeting method, espoused by Dave Ramsey and all manner of other financial gurus, is really pretty sweet.  What doesn't get used in one envelope (or category), can be shifted to another.  What isn't used in one month in your category (i.e., groceries), can be rolled over to the next month.

In my May 2011 grocery budget, for example, I underestimated my monthly $200 alotment by $8.  (Maybe it was all those coupons I used!).   In any case, those $8 are now sitting in June 2011 budget line item as a (-$8) for a total amount available to spend of $208.    Don't be mislead by the negative sign -- I wish Mint hadn't used that in their visual display of your envelope.    It just means that you have $8 dollars left over from last month and those $8 will be used up first in the budget tracking, before you get to the newest monthly funding.

Love, love, love the new update to Mint.com.  I'm able to use a software that is Free (yep, that's a capital F) and doesn't stick me with annual upgrades that must be taken or else the software doesn't work on my computer anymore.  (Tricky, Quicken, but not a good way to win customers/friends).  Mint.com is also Web-based, so I'm not chained to my Quicken desktop software application.  

I know not everyone is a Mint.com fan, and it doesn't track my tax issues as well as Quicken.   Do you have a favorite?

Other posts you might like:

Pear Budgeting Software Review
Original Mint.com Review
You Need a Budget Software Review

Sunday, May 22, 2011

Why I Don't Want to Pay Off My Mortgage

When I downsized into 1200 square feet from 2500 by selling my home, a lot of new questions popped up. 
  • Rent vs. Buy my next living space?
  • If buy, then how much mortgage?  How much down payment?
  • How many years to pay off the mortgage?
I did rent for a while, then I bought, so that answered one of the burning issues.  (And I saved money renting!)   Now I'm working toward financial freedom and keep fighting the urge to pay off my mortgage.  
Reasons to pay off:
  • Great peace of mind (no mortgage payment - yeah!
  • Sense of accomplishment
  • Pride of ownership

Hmmm....wait a minute...these are mostly emotional reasons, aren't they?  Then I began reading Ric Edelman's best-seller "The Truth About Money."   He cites 11 great reasons to carry a big ole' mortgage.  What?? 

At least two of the elevent reasons have to do with tax benefit -- which I disagree with.  Figure your interest payment each month ($350*12 for me = $4,200).  My mortgage tax deduction doesn't decrease my my taxes paid by $4,200.  My contribution toward my 401 (3) B helps my tax burden out much more than that.  
But one good argument that really caught my attention:  your mortgage is really against your salary -- not the value of your home.  Bankers give you a mortgage based on your ability to repay it via your salary.  After your retire -- will you be able to get a mortgage for your primary home?  Probably not.  How much equity is in your home that is frozen there unless you sell?  Probably a LOT.  How much cash will you need in retirement?  As much as you do now! 
For many of us, our homes are our primary asset.  A mortgage is a way of getting to that cash.  Hmm....I'm not so interested in paying off my mortgage in 15 years now.    But it still drives me nuts that I'm paying so much in interest -- which isn't nearly offset by the tax advantages. 
Are you house rich and cash poor?  Or are you keeping a mortage (as long and as low a rate as you can get?) 

Thursday, February 10, 2011

Taxes and Medical Expenses

Considering how much I paid out in dental bills last year (two root canals!), I'm hoping that I can deduct at least some of my medical bills.    Here's a first pass look at whether or not it's worth dragging out all those receipts. 

1)  I can deduct anything above 7.5% of my AGI.  Last year's AGI hovered around $50,000 -- so I'll only be able to deduct expenses above $3,500 or so...probably closer to $4,000, since I got a raise last year. 

So...2) Expenses paid out of my Flexible Savings Account for Health costs = $100 * 26.....Wait a minute...Nope!  Page 142 of IRS publication 17 points out that I can't deduct these costs because I paid for them with contributions made on a pre-tax basis.  I guess the same thing goes for my health insurance premiums and my dental insurance premiums, since I pay for them on a pre-tax basis as well.  

Note:  If the amount is listed in Box 1of your Form W-2, you might want to ask your employer if the premiums were deducted pre-tax.  If they are in Box 1 of Form W-2, then they may not have been.

3) I know I had at least $750 in fees, because that's my deductible.  If I paid for anything toward my daughter's (dependent) costs, that would be covered as well.    Time to go digging those receipts out!

Here's a recap of the medical expenses tax table (on page 142) from the IRS publication 17.

More Tax Fun!

Common Tax Goofs
How Long to Keep Tax Records