Two Costly Tax Deduction Mistakes

3 Minute Read

By Dave Ramsey

I hate doing taxes. That's why I hire someone to do them for me. However, I do know the outrageous lengths people go to in order to get deductions - even if the deductions don't make mathematical sense. Here are two that I hear most often:

"It is wise to keep my home mortgage to get the tax deduction."

Wrong! If you've listened to me for any amount of time, you know I strongly encourage people to pay off their mortgage so they have their entire income to use for wealth building. (This is, of course, after you've paid off all your other debts, have an emergency fund, and started investing for retirement and your children's college funds.) But when I talk about paying off the mortgage, I almost always hear from someone touting the tax deduction.

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Let's do the math. If you have a home with a payment of $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would in fact lose the tax deduction, so the myth says keep your home mortgaged because of tax advantages.

If you don't have a $10,000 tax deduction and you're in a 30% tax bracket, you will have to pay $3,000 in taxes on that $10,000. According to the math, we should send $10,000 in interest to the bank so we don't have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000.

"I can write off my car lease as a business expense."

If you own a business and lease a car, your business can write off that car as a business expense. First you should know that Consumer Reports, Smart Money and my calculator say that leasing a car is the worst possible way to acquire a vehicle. Creating an unneeded business expense for the sake of a tax write-off is bad math just like the mortgage deduction.

My company owns my cars, which were purchased (with cash) used. We are able to straight-line depreciate those cars or write off the mileage. If you drive inexpensive cars in your business and put high mileage on them, take the mileage deduction. If you drive expensive cars but don't put many miles on them, take the straight-line depreciation. Both tax deductions are available to you without having a stupid car payment.

If you don't own a business and didn't understand anything I just said about tax write-offs, don't worry. Just know that, as a wise business owner, you don't want to lease a car.

Here's the key to tax deductions: do the math. If what you do to get the deduction costs you more than the deduction is worth, don't do it.

Don't take chances on your taxes. Contact one of my tax experts today.

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