The Perfect Tax Deduction

Every year about this time I get phone calls from people who have just met with their CPA or tax professional. They call me because they were told that they need to buy a house so that they can have the tax write off. This has always been troubling to me. A tax write off is not the reason to buy a house. Neither is a tax rebate by the way, but I will try to remain focused.
Homeowners get to deduct the interest that they pay over the year from the gross income thus reducing the amount of taxes that are paid. I get why CPA’s and tax preparers may be telling their clients to do this, but they are terribly wrong. I am always fascinated by financial people who cannot do math. It’s kind of like a shop teacher with missing fingers.
I want folks to buy a house. But broke people shouldn’t buy a house. You really shouldn’t buy a house until you do some things:
1. Pay off all of your debt. This includes cars, student loans, credit cards etc.
a. According to the Federal Reserve and U.S. Census Bureau the average American household has $91,000 in debt.
2. Save 3-6 months of expenses for emergencies.
a. According to the U.S. Courts, annual bankruptcy filings have almost doubled since bankruptcy laws were reformed in 2005. Now there are one million bankruptcy’s filed each year.
3. Save 15%of your gross income toward retirement.
a. USA Today has found that 60% of the 77 million baby boomers will not have the means to retire to support their current standard of living.
b. 28% of Americans polled by AARP said they spend more time watching reality tv than they do planning for their retirement.
You might be thinking, “This will take forever!” No. It may take a few years but that is hardly forever. The average family that lives on a budget, and is intense about their finances can pay off their debt in 18-24 months. Take another year or so to save up your emergency fund and then you can put money away for retirement while you start saving up for a down payment.
Back to the tax deduction. First we have to fully understand what a tax deduction really is. For example, let’s say you have a $400,000 mortgage and you pay 5% interest. Your interest payments are $20,000 annually. Your tax on $20,000 would be $5,600. Basically, in order to save $5,600 in taxes, you are sending $20,000 to the bank and your CPA calls that a “tax deduction.”
If you need a tax deduction while you are saving to buy a house try this. GIVE MORE MONEY. Yes, that’s right. Increase your charitable giving. It has the exact same effect.
To read more articles and to find out more about Financial Peace University email me at Alex@ChinoHillsMortgageMan.com or of course you can respond to this post.