Some Financial Advisers recommend that their clients not pay off their mortgage early because the mortgage interest creates a tax deduction.  This is bad advice and the example below that Dave Ramsey uses illustrates why:

Let’s suppose that you have a $200,000 mortgage with a 5% interest rate.
This means that you would pay roughly $10,000 in interest this year ($200,000 x .05).

Now, lets suppose that your income is $50,000 per year and that put you in a 25% tax bracket. 

With the mortgage above, you would be able to take a tax deduction of $10,000, so instead of paying taxes on $50,000, you would pay taxes on $40,000. 

In a 25% tax bracket, taxes on $10,000 would be $2,500 ($10,000 x .25).  So, having a mortgage saved you $2,500 on taxes.  That’s good news, right?  Not really.  In order to save that $2,500 in taxes, you paid $10,000 in interest to the bank that holds your mortgage. 

You swapped $10,000 for $2,500.  That is a bad idea!

If you really want the $2,500 tax deduction, then give $10,000 to your church or a qualified charity.  The tax deduction is exactly the same as if you had a mortgage, but you did not have to stay in debt and risk your home in order to get it!

Personally, I would stay away from any Financial Adviser who recommends that I keep a mortgage for the tax deduction.

Many people look forward to tax time because they love getting tax refunds. They are under the mistaken impression that Santa Claus lives in Washington DC.

Unfortunately, in most cases, a tax refund is not a gift from the government. It means that you have loaned the government your money throughout the year interest-free and they are giving you back your money.

If you want to make the most of your hard-earned money, adjust your withholding so that you get less than $100 back at the end of the year. For example, if you typically get a $2400 refund, visit your HR department and ask them to tell you the correct number of exemptions to claim so that you take home an extra $200 in your paycheck each month. Then complete a W4 and adjust your exemptions by that number.  Make your money work hard for YOU throughout the year instead of letting the government use it.

It’s that time of the year again, and for many self-employed and independent sub-contractors, the stress levels surrounding the filing of income tax returns can be overwhelming. However, proper planning and diligence can bring peace to an otherwise taxing (pun intended) situation.

My wife is self-employed and receives commissions for the work she does. There are no taxes withheld on her commissions, so we withhold on ourselves. We do this by setting aside 25% of any money that we take home from the business into a savings account with ING bank.

Imagine the peace that you will feel when, after figuring your taxes and finding that you owe $7,000, you realize that you have $9,000 sitting in your account to cover the bill. That equals an instant $2,000 refund that earned YOU interest throughout the year.

I am not a tax expert, but the 25% figure should work for situations where your income is less than $100,000 annually. Be sure to consult with a tax expert to confirm that this will work for your situation.