Need A New Accountant
Lori's getting bad information from her accountant regarding her taxes.
QUESTION: Lori is a physician who is completely debt free, has a $100,000 emergency fund and maxed out her retirement. She is in a great position with her money and wants to do even better. Her accountant told her that the only way to reduce her taxes is to buy a house. Dave thinks it’s time for a new CPA.
ANSWER: I don’t like the fact that your CPA can’t add, and I think it’s time for a new one. She wants you to get a mortgage so you have an interest deduction.
If you have a $200,000 mortgage at 5%, you pay $10,000 a year in interest. If you pay the bank $10,000 and make $150,000, you deduct the $10,000, which is why your accountant brought this up. If you deduct that tax money, you’ll only pay taxes on $140,000 in income instead of $150,000.
If you buy a house with cash and have no interest to deduct, you’ll pay taxes on $150,000 in income. If you’re in a 33% tax bracket, that $10,000 difference in income would be taxed to the tune of $3,300. Your accountant thinks it’s a good idea to send $10,000 to the mortgage company so you don’t send $3,300 to the government. I’m not going to trade a dollar for a quarter and call that smart. You’re just someone who has produced, and as such you must be punished by the government.
There is one way to reduce your taxes that your CPA didn’t mention, and that is to give money to charity. It’s the exact same math, and you don’t have to go into debt to do it. Just increase your giving by the amount that you were going to pay in interest. Charity needs it more than the mortgage company.