The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

October 29, 2009

The Mortgage Interest Myth

Filed under: Goals, Mortgage, Personal Finance — Tags: , , , , , — thebalancedspreadsheet @ 8:33 am

Those of you who have visited The Balanced Spreadsheet for a while now, know that one of our financial goals is to pay off the mortgage as soon as possible.  As I wrote in “To pay or not to pay” some people cite the mortgage interest tax deduction as a reason to not pay down the mortgage.  Today I am going to explain why this reason is a complete myth. 

For our example, let us assume you have a mortgage balance of $200,000 at 6.0%.    That means you will pay $12,000 of interest during the year.  If you itemize your deductions you will be able to deduct the $12,000 off of your income.  If your income for the year was $100,000 you would then pay taxes on $88,000.  This would put you in the 25% federal tax bracket if you are married filing jointly.  This means you would have a tax savings of $3,000 ($12,000 x .25).  So basically you are paying the bank $12,000 so you do not have to pay the IRS $3,000.  That is definitely not a winning game plan.  If you really want the tax deduction just give $12,000 to a charity of your choice, that way you still get the deduction but you do not have to go into debt to get it. 

Bottom line is this:  If you have a mortgage and are able to deduct the interest on your income taxes then do it!  It is a nice benefit to have come tax time.  However there is absolutely no reason to keep the mortgage just for the tax deduction.  Sadly there are some financial and tax advisers, who are other wise good, that will advise you to keep the tax deduction.  If my advisers give me that advice then I am getting a new one.  🙂

September 29, 2009

How much do I pay in taxes?

Filed under: Personal Finance, Real Example, Simulation — Tags: , , , , — thebalancedspreadsheet @ 7:59 pm

Have you ever wondered how much you really pay in taxes each year?  I was curious and decided to see what my real income tax rate is.  I took what my wife and I had made so far this year and projected our earnings for the fourth quarter of 2009 and came up with our gross income.  I then did a tax projection and came up with the following:

09-29-09 How much do you pay in taxes


 We are in the 15% Federal tax bracket, but due to itemized deductions, 401(K) contributions and the Making work pay tax credit, we will pay about 7.5% of our gross in federal income taxes.  Our Social Security and Medicare taxes are blow their rates of 6.2% and 1.45% respectively due to health insurance premium deductions.  Even though property taxes are not tied to income, I included them anyways because they are a tax.  Unfortunately I do not keep all my receipts (I am not that much of a nerd. :)) though out the year to add sales tax in my calculations. 

The 22.45% tax means we worked until March 23rd to pay all our taxes for the year.  According to research done by the Tax Foundation, we beat Ohio’s average by 19 days (April 11th) and the national average by 21 days (April 13th)!

This post is not mean to be a pro-tax or anti-tax post.  It is just meant to be fun to see how much you really pay in taxes each year.  If you work for an employer most of your taxes are already taken out of your paycheck before it even gets to you and it is easy to forget to check how much you pay each year.

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