Tip Of The Month - Does It Still Make Sense To Carry A Mortgage?

| August 15, 2018
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It’s a question we hear all of the time. From a pure tax standpoint, we’re not sure it ever makes sense to carry a mortgage. Just like the comment frequently brought to us: “My taxes are too high; I need more deductions. What should I buy?” Let’s think about that for a moment. If you are in the 25% tax bracket, and you buy a piece of equipment just for the write-off, what have you actually accomplished? In this example, you have indeed lowered your tax bill and saved $250 in taxes, BUT you have spent $1,000 to save $250, thus you now have $750 less money in your bank account. The bigger the purchase, the larger the effect and the deeper the hole. The same holds true for carrying a mortgage, but on a much larger scale.

Another consideration is the impact of the Tax Cuts and Jobs Act of 2017 that raised the standard deduction for tax years 2018 through 2025, when the tax provisions are set to expire. Under the Act the standard deduction rises to $24,000 for married filing jointly, $12,000 for single and married filing separately, and $18,000 for head of household. If you are over age 65, blind or disabled, you can add $1,300 to your standard deduction ($1,600 for unmarried taxpayers). Keep in mind that your deduction for taxes is capped at a maximum of $10,000, miscellaneous itemized deductions have been eliminated, mortgage interest is now deductible only on the first $750,000 of debt, and home equity interest is no longer deductible. So, ask yourself, even with mortgage interest, will my deductions exceed the new higher standard deduction amounts and by how much? The tax benefit of carrying a mortgage is likely to be greatly reduced or eliminated altogether.

At Treasure Coast Financial Planning, we are mindful not to let the tax tail wag the dog. While taxes are a consideration, they are not the sole driver of decisions. In fact, sometimes it even makes sense to pay more tax now at these lower rates than in the future at possibly much higher rates. Ask yourself some of the following questions: Is a mortgage necessary to buy this home? What is its true cost? Can I afford the payments under long-term market and financial scenarios? Do I even need this piece of equipment (if so, then timing of the purchase becomes the important factor not the purchase itself)? What is the impact on my financial plan? My long-term wealth? My legacy? Have you created or recently updated your financial plan? If not, we can help you get started.

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