Have you ever had someone advise you to take on debt (such as a mortgage or a car lease) so you can get a tax break?
Maybe it was your dad, a friend, or even a trusted professional such as an accountant whom you trust to give you good, solid financial advice.
A tax break for taking on debt can sound like a good idea. Who doesn't want to save money on taxes?
But is taking on debt to get a tax break really all it's cracked up to be?
Read on and I'll clue you in.
A Tax Break For Going Into Debt
I'll start by asking you a question:
If someone told you to go to the pet store and pay $1,000 to buy a snake, and for doing that, they would give you a fresh, crisp $100 bill, would you do it?
Even better, you don't have $1,000, so you borrow the money.
Now think about this.
You don't want a snake, you don't need a snake, heck, you're not even sure you like snakes.
But the guy promises to give you a $100 if you do it.
Awesome!
That's a C-note straight into your pocket!
You would jump at that deal, right?
Maybe not. Seriously, who would be dumb enough to spend $1,000 of money they don't have just so someone will give them $100 in return.
That would be just plain foolish, now wouldn't it?
But people do it every day.
Saving Money on Taxes Isn't Always Wise
A salesman tries to convince you to lease your vehicle instead of financing or paying cash because “there are tax advantages”.
Really?
You're going to take tax advice from a car salesman? Never mind that leasing a car is the most expensive way to drive a vehicle by far. Yes, you're getting a tax break, but you're also paying through the nose for that lease.
Or how about the well meaning person who convinces you that you need a mortgage so you can get a tax break? Never mind that you can barely afford rent and you would have to finance a house at 100% because you really can't afford a down payment.
Yeah, I know, you'll save $5,000 a year on your taxes.
You'll also end up underwater or in foreclosure.
Tax Deductions are Great, When Used Wisely
Listen, getting a tax break is a great thing. I take advantage of as many as I can when I qualify for them.
However, taking on debt you don't need for the sole purpose of getting a break on your tax bill is seriously unwise.
Don't let someone convince you to buy something you can't really afford or don't need just so you can have your taxes reduced. It's a recipe for disaster.
If you need a car, there are ways to buy one that don't involve getting taken advantage of financially with a lease.
If it's the right time for you to buy a house and you can afford a substantial down payment on a sensible mortgage, then go for it. Enjoy the tax advantages of home ownership that come with it.
But if it's not the right time for you to buy a home or anything else, then don't do it just to save money on your taxes.
Don't buy a $1,000 snake just so you can get $100 back.
Question: Have you ever taken on a car lease or a mortgage just for the tax advantages?
Leave a comment and tell me about it.
Resources:
12 Wise Steps to Buying a House
What if My Home is Underwater?
I used to hear schemes all the time from clients I did taxes for. I would try to help them understand this concept but some people were certain they had found their personal loop hole.
Not everybody is good at even the simplest math…
I know a couple who paid off their mortgage one year and got dinged significantly on their taxes the next. So, they took out a home equity loan to avoid paying out the nose for taxes. I don’t know the details, but I remember thinking it was too bad they did that having just paid off their mortgage. This story makes me wonder how they came to that decision and what calculations they did to determine that more debt was the best choice.
Yes, it makes you wonder what kind of math they were using and/or who was giving them advice. Not a wise move on their part,for sure! Thanks Kendal!
Lol, I LOVE the snake analogy. 🙂 I know that people do stuff like this every day and it really does not make sense most times, especially considering the tax benefit may not be dollar for dollar. If we need something and get a tax benefit then I view it simply as that…an extra benefit and not the reason why I would buy something.
Thanks man! Getting a tax break is a good thing but never a primary reason for spending money. That kind of thinking tends to get a lot of people into trouble. Thanks for the comment!