Dear Dave: My wife and I are looking at buying a new home. We’ve been really blessed with our finances, and we’re at a point where we can pay cash for a new house and still have plenty of money in the bank. Should we do this, or is it a better idea to get a mortgage for the tax deduction?
Dear Brian: I think the real question is this: Why wouldn’t you pay cash if you have the ability to do so? I would never advise someone to get, or keep, a mortgage just for the tax deduction, because these tax deductions are never 100 percent.
Let’s pretend you had a $200,000 mortgage at five percent interest. That would be $10,000 a year in interest. If you take a $10,000 tax deduction and you’re in a 25 percent tax bracket, that would save you 25 percent of $10,000 on your tax bill — or $2,500. So, you would never send $10,000 to your mortgage company just to avoid sending $2,500 to the IRS. You don’t keep a mortgage just for the tax deduction. That’s trading a dollar for a quarter, and you don’t want to do that. Everybody thinks losing the tax deduction is an awful thing, but you could give $10,000 extra to your church — something you don’t have to be in debt to do — and get the same tax write-off.
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There are numerous positive aspects to staying out of debt. One big thing it does is change your risk level. It gives you a level of peace and security you’ll never have when debt is hanging over your head. All that money that was going out the door to the bank can be used to build wealth and give like never before!
Dear Dave: I paid off my house a little over a year ago, and I’m completely debt-free. That’s a good thing, because I recently had some large medical bills and I don’t have quite as much cash as usual on hand. My younger sister recently received a tax bill from the IRS for $30,000. I love her to death, but she’s extremely irresponsible with money and in debt up to her eyeballs. I know how you feel about debt, and I’ve tried to teach her how to handle money, but considering her situation — should I take out a home equity loan of $30,000 to help her?
Dear Toni: Absolutely not! Does that mean you don’t love her and care about her? It does not. But you told me she won’t behave with money. You don’t give money to people who won’t behave with the stuff. That kind of behavior doesn’t help anyone, and it doesn’t fix the problem. It’s like giving a drunk a drink.
“Help” would be aiding this lady in changing her ways when it comes to finances. If you just give her a fish, it will stink and go bad. You have to teach her to fish. That attitude is not about being mean to her, it’s just where she is in her life. She needs to be educated, not enabled. And it doesn’t mean she’s a bad person, either. It just means you can’t endorse negative behavior or participate in her denial.
Keep trying to teach her, and pray for her. Make sure, too, that she’s in contact with the IRS about a payment plan. I know she’s your little sister, but you can’t fix this one for her. Sometimes the best help you can give someone is to help them change their behavior. That way, they will hopefully learn how to carry their own weight.
Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.