A smart income tax reduction strategyArticle added by Lew Nason on September 13, 2011
Joined: October 13, 2006
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Most workers will pay about 40 percent on each dollar of income when all taxes — federal and state income taxes, sales taxes, taxes for benefit programs, etc. — are considered.
If you were eligible for a federal income tax deduction, how much of a deduction would you want to have? Wouldn’t you want to have the largest deduction you can possibly get?
Now, how long do you want to be able to reduce your federal income taxes? Wouldn’t you want to reduce your federal income taxes for as long as possible?
The problem is that most of the traditional advice (conventional wisdom) we receive is telling us to do just the opposite. By following conventional wisdom in most cases we are reducing and eliminating many of our last remaining tax deductions.
Consider, the federal government has slowly but surely been increasing our taxes without calling it a tax increase. In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson found that our all-in marginal tax rate is 40 percent, give or take a bit. Yes, you read that right: 40 percent.
Most workers will pay about that much on each dollar of income when all taxes — federal and state income taxes, sales taxes, taxes for benefit programs, etc. — are considered.
"What all of us have to watch out for is much more subtle — new and improved forms of weasel wording that raises taxes without seeming to raise taxes. Both parties do this; witness the dreaded alternative minimum tax and its equivalent for retirees, the taxation of Social Security benefits. Then think about disappearing itemized deductions and the disappearing standard exemption."
Scott Burns, Financial Columnist, Universal Press Syndicate
Laurence J. Kotlikoff, professor of economics at Boston University and author of the book, “The Coming Generational Storm,” has concluded, “After calculating the immediate and permanent federal personal and corporate income tax hike needed to achieve generational balance … the requisite tax hike is a whopping 69 percent.”
There are plenty of other authors out there saying the same things. Based on the current federal debt, Social Security short-falls, etc., I think you'll agree that income taxes are going to be higher in the future.
Bad advice from most financial advisors
For years, most financial advisors have been telling us, “Pay off your home mortgage as quickly as possible and you’ll save thousands of dollars in interest payments.”
On the surface, this may appear to be very sound advice. But is it? When we follow their advice and pay additional money towards our mortgage principle, aren’t we lowering our tax deductible mortgage interest each year? In effect, we are killing one of the last remaining income tax write offs that we have today.
Remember, it's not what you make. It's what you keep.
If you were instead to invest the extra money you would have put towards your mortgage principle, at a rate higher than you are paying for your mortgage (tax deferred), you could pay off your mortgage even earlier. And, you’ll still have the mortgage interest income tax deduction for that whole time.
“The decision to invest in a home is not only a practical decision in terms of meeting lifestyle and family needs, it can also serve as a means of accumulating wealth through property appreciation. Additionally, with the deductibility of mortgage interest and the special treatment of capital gains there are unique benefits associated with leveraging an investment that is a relatively stable asset. Thus, a properly financed home can enhance an individual's overall investment strategy."
Smart mortgage equity management
Rather than viewing all debt in a negative light, I believe that specific types of debt, such as a home mortgage, can play a very strategic role in a family’s overall financial profile. Successful mortgage equity management ultimately allows existing assets to grow undisturbed, free from the possibility of liquidation, while providing liquidity for further investment opportunities that may potentially enhance a family’s net worth.
To put it another way, if your can make more on your money than it’s costing you to borrow the money, why wouldn’t you borrow the money?
Consider, isn’t that the premise behind any successful business? They borrow money to invest in their business at a competitive interest rate and then they write off that interest on their income taxes each year. They know that when the money is used properly, every dollar they borrow and invest in their business to grow sales and increase their profits will have a return on investment of 15 percent or much more each year.
If you could use the same premise with your home mortgage interest and make more on your money than it’s costing you, how much better off would you be?
Let’s free up those lazy, idle dollars that are trapped in your home. Let’s find the money to live debt free and truly wealthy.
“A penny saved is a penny earned.”
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