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Loans and Taxes
Q: I have saved some money and now have enough to pay off my house, but I don’t want to lose the mortgage interest deduction. Should I pay off the loan or keep the loan to save on taxes?
A: There are many rules embedded in the Internal Revenue Code but one that should be listed above all others and is nowhere to be found in the Code is Never, Ever spend money just to get a tax deduction. It seems tempting when reviewing your tax return at the end of the year to make sure you have lots of deductions because they reduce the tax that you owe. The more in deductions, the less tax you have to pay. But remember that every dollar in tax savings generated by a deduction has already cost you about three dollars.
Never incur an expense solely to get a tax deduction. Period!!!
The real question to ask with regard to your home mortgage is not whether to use your cash to pay off the loan, but rather what is the best use of that cash that you have worked so hard to save. If you are paying four percent interest on your mortgage and your cash is sitting in a money market account earning virtually nothing, you will be way ahead of the game by paying off the loan. If on the other hand you are investing those dollars and earning in excess of four percent, then you are better off keeping the mortgage in place and earning the extra amount via your investment portfolio.
The bottom line here is that paying off your mortgage loan is not a tax decision. Evaluate your other cash flow needs, both personal and business, consider liquidity needs for the future and let those factors help decide what to do with your cash. Never keep paying interest on a loan just to get a tax deduction.
As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.