I get a lot of questions with regards to what can be deducted for tax purposes. I want to caution you though that you are not paying extra just to save on your taxes. The biggest example of this is the home mortgage. Many people ask me about having or maintaining a home mortgage for the purpose of the tax deduction. But I want you to look at it this way:
If you pay $10,000 a year in mortgage interest and you are in the 25% tax bracket, you save about $2,500 on your taxes. So you are PAYING $10,000 in order to “save” $2,500 on your taxes. When you look at the numbers like this, I hope you agree that this is not a wise decision. If you are in the 15% tax bracket, you only “save” $1,500 on your taxes. So if you ask me if you should take out a home equity loan so you can have more interest to deduct, my answer is “No!”.
Another situation to avoid is the home equity loan. Many people these days are “learning” from banks and other financial institutions that cars and vacations and lots of other things can be “paid” for using a home equity loan and then the interest paid on the loan is deductible. As a trained Budget Counselor, I strongly disagree with
this logic. First of all, never buy something you cannot afford, especially on credit (and that’s what a home equity loan is). Second, never turn “short-term” borrowing into “long-term” borrowing by using your home equity (and putting your home at risk). Third, as you can see in the example above, the amount you pay in interest is a lot more than the amount you pay on your taxes, so you are not “saving”anything!
Remember this simple tip: Saving is money you keep, not money you spend. Sorry, but any way you look at it, if you get an $80 stereo on sale for $40, you DO NOT save $40, you spend $40! I hope you find this tip informative and helpful.