Don’t Create a Tax Deduction For the Sake of Having a Tax Deduction

I read all the time about financial people advising to set your life up to be eligible for as many tax deductions as possible.  They give you all of the numbers and show you how much money you can save throughout the year if you have a mortgage, student loan debt, and various other things that create a tax deduction.  However, the financial world has gone one step further to encourage consumers to keep their debts that are tax deductible for as long as they can to milk the deductions.  This is completely absurd, and again, anything you say to me will not change my mind about it.  NEVER CREATE A TAX DEDUCTION JUST FOR THE SAKE OF HAVING A DEDUCTION. 

If you pay the government $1500 in interest for the year, then you’ll save about a hundred dollars in taxes.  BIG DEAL!  I would gladly take $1500 from you and give you back 10 – 20% of it at the end of the year.  People are being advised every day not to care about paying off their mortgages or student loans because it creates tax savings.  Why would you ever tell someone to keep debt around to receive an amount of money that is considerably less than what you are paying out in interest each year?  It does not make sense to me.

By all means, if you have something that is tax deductible, then you DEFINITELY take advantage of the tax deduction.  But never let it dictate the way you handle your money.  If you have the ability to pay off your student loans or mortgage, then that is always a better way of using your money than making a stupid 5% return on it and continue paying interest to the bank.  My point is that you should never keep something that charges a large amount of interest for the sole reason of having tax savings.  The savings is never enough to justify keeping it around. 

  • SZ

    I completely agree with this, but SO many people don’t get it. With taxes, it is almost always the opposite of what one thinks. Just like if you’re paying more income tax (all else equal), it probably means you’re actually making more income! So that’s a good thing, not a bad thing. If you’re getting more deductions, then chances are, you’re paying more money somewhere than if you were to get less deductions. So it’s actually a bad thing.

    Another tax “opposite” people don’t understand: After filing taxes, you want your tax refund to be as little as possible because that means you’ve kept more of the money that belonged to you in the first place without lending it to the government for free throughout the year.