Will Paying Off Your House Mean Higher Taxes? - Dave Ramsey Rant

Summary

In this informative script, the speaker challenges the common misconception that paying off a mortgage early is financially unwise due to potential tax implications. They explain that under current tax laws, the majority of Americans will not itemize deductions, making the mortgage interest tax deduction irrelevant for most. The speaker advocates for prioritizing debt elimination and highlights a study showing that paid-off homes and steady retirement investments are key wealth-building strategies for millionaires.

Takeaways

• 🏠 Paying off your mortgage early is recommended despite common misconceptions about tax deductions.
• 📊 Under the current tax code, most Americans take the standard deduction, which means they don't benefit from mortgage interest deductions.
• 💰 The standard deduction has been significantly increased, reducing the number of people who itemize deductions, including mortgage interest.
• 🧐 Don't take financial advice from people who are not financially successful; they may not understand the tax implications correctly.
• 🤔 The idea that paying off a mortgage will put you in a higher tax bracket is a myth, as most people do not itemize their deductions.
• 📈 If you do itemize and have a mortgage interest deduction, the actual tax savings are much less than the mortgage interest paid.
• 🤑 The speaker argues that keeping a mortgage for the tax deduction is financially unsound, as you're essentially giving away money to save a smaller amount in taxes.
• 📚 The script references a study of millionaires, indicating that a paid-off home and steady retirement investments are common wealth-building strategies.
• 🏦 The tax deduction on mortgage interest is minimal for most people, and the perceived benefits are often overstated.
• 📉 The marginal tax system means that only the last dollar of income is taxed at the highest bracket rate, not the entire income.
• 🚫 The speaker advises against listening to uninformed opinions about keeping a mortgage for tax purposes and encourages financial education.

Q & A

Why is Maritza in Maryland considering paying off her house last according to the advice she received?

Maritza is considering paying off her house last because she has been advised that doing so could place her in a higher tax bracket due to the loss of mortgage interest tax deductions, which she believes might lead to paying higher taxes.

What is the speaker's general advice on taking financial advice from others?

The speaker advises not to take financial advice from people who are not financially successful themselves, comparing it to not taking dieting advice from someone who is overweight.

What is the current tax law regarding standard deductions for married couples in the United States?

Under the current tax law, enacted two years prior to the script's context, a married couple has a $24,000 standard deduction, which means unless their itemized deductions exceed this amount, they will likely take the standard deduction on their taxes.

Why does the speaker claim that most people do not benefit from the mortgage interest tax deduction?

The speaker argues that due to the increased standard deduction under the current tax law, most people do not have itemized deductions that exceed the standard deduction, and therefore, they do not itemize and miss out on the mortgage interest tax deduction.

What is the impact of paying off a mortgage on taxable income according to the script?

Paying off a mortgage means losing the mortgage interest tax deduction, which reduces taxable income by the amount of the interest paid. However, the actual tax savings is the tax rate applied to the reduced taxable income, not the full amount of the interest paid.

How much tax savings would a person in a 22% tax bracket realize if they had a $10,000 mortgage interest deduction?

A person in a 22% tax bracket would save $2,200 on their taxes if they had a $10,000 mortgage interest deduction, assuming they itemize their deductions.

What does the speaker suggest is a common misconception about the tax benefits of keeping a mortgage?

The speaker suggests that a common misconception is that people believe they should keep their mortgage to maintain the tax deduction on mortgage interest, even though most people do not itemize their deductions and therefore do not actually benefit from this tax break.

What is the speaker's view on the advice given by people who suggest keeping a mortgage for tax reasons?

The speaker views this advice as misguided and based on a lack of understanding of how tax deductions work, labeling those who give such advice as 'morons' for trading $10,000 to save $2,200.

What does the speaker suggest is a key factor in building wealth according to the research done for 'Everyday Millionaires'?

The speaker suggests that having a paid-off home and investing steadily in mutual funds through a retirement plan, such as a 401k, are key factors in building wealth, as evidenced by the research done for 'Everyday Millionaires'.

How does the speaker describe the marginal tax bracket system in the United States?

The speaker describes the marginal tax bracket system as a progression where different portions of income are taxed at different rates, with only the last dollar of income being taxed at the highest applicable rate, not the entire income.

What is the speaker's final advice to Maritza and others considering paying off their mortgages?

The speaker's final advice is to ignore the advice of those who are not financially successful and to pay off mortgages as soon as possible to avoid unnecessary interest payments and build wealth.

Outlines

00:00

💡 Debt-Free Journey and Tax Myths

In this paragraph, Maritza from Maryland shares her progress towards becoming debt-free after attending a financial class earlier in the year. She mentions a common misconception about paying off the house last due to concerns over tax implications. The speaker refutes this by explaining the current tax code, which has increased the standard deduction to $24,000 for a married couple, making it highly unlikely for most people to itemize deductions, including mortgage interest. The speaker emphasizes that the idea of losing a tax deduction by paying off a mortgage is a myth, as less than 5% of Americans actually itemize their deductions. He further clarifies that even if one does itemize, the tax savings from mortgage interest are minimal compared to the actual interest paid, illustrating this with a hypothetical mortgage of $200,000 at 5% interest, which would save a person in a 22% tax bracket only $2,200 in taxes. The speaker advises against financial advice from those who lack understanding or experience in the matter.

05:02

🏠 The Truth About Mortgages and Wealth Building

The speaker continues the discussion on mortgages, sharing personal experiences from his early days in real estate when he was advised to encourage larger mortgages for tax benefits. He points out the irony that despite the minimal number of people who actually benefit from mortgage interest deductions (less than 5%), the myth persists. He emphasizes the importance of not listening to uninformed advice and instead focusing on paying off mortgages as quickly as possible. Supporting this advice, the speaker cites a study from Chris Hogan's book 'Everyday Millionaires', which found that the typical millionaire has a paid-off home and a well-funded 401k as their primary sources of wealth. The speaker also explains the concept of marginal tax brackets, clarifying that being in a 22% tax bracket does not mean paying 22% on all income but rather that the last dollar earned is taxed at that rate. He concludes by reinforcing the message that paying off a mortgage early is a smart financial move and that the tax benefits of keeping a mortgage are largely overstated.

Keywords

💡Debt-free

Being 'debt-free' refers to a financial state where an individual or entity has no outstanding debts or liabilities. In the video's context, Maritza is expressing her excitement about reaching this state after attending a financial class, which is a central theme of the video advocating for financial independence and stability.

💡Tax deduction

A 'tax deduction' is a reduction of an individual's taxable income, allowing them to pay less in taxes. The video discusses the misconception that keeping a mortgage for the tax deduction is a wise financial move, but clarifies that due to the standard deduction, most people do not actually benefit from this.

💡Standard deduction

The 'standard deduction' is a fixed amount that reduces an individual's taxable income, eliminating the need for itemized deductions for most taxpayers. The video explains that under current tax laws, the standard deduction is so high that very few people benefit from itemizing, including mortgage interest.

💡Itemized deductions

Itemized deductions are specific expenses that can be subtracted from an individual's taxable income if they exceed the standard deduction. The script emphasizes that due to the increased standard deduction, itemizing, including mortgage interest, is now uncommon.

💡Mortgage interest

Mortgage interest refers to the interest portion of a mortgage payment that is deductible from an individual's taxable income. The video script uses this as an example to illustrate the point that most people do not get a tax benefit from their mortgage interest due to the standard deduction.

💡Tax bracket

A 'tax bracket' is a range of income that is taxed at a specific rate. The video clarifies that being in a higher tax bracket does not mean paying a higher percentage of all income in taxes, but rather that the last dollar earned is taxed at the higher rate, which is a common misunderstanding.

💡Millionaires

The term 'millionaires' is used in the video to refer to individuals with a net worth of between $1 million and $5 million. The video cites research indicating that paid-off homes and retirement investments like 401ks are common among this wealth group, reinforcing the video's message about smart financial planning.

💡401k

A '401k' is a retirement savings plan that allows employees to invest a portion of their pre-tax salary. The video mentions 401ks as a primary source of wealth for the millionaires studied, highlighting the importance of long-term investment in retirement plans.

💡Marginal tax rate

The 'marginal tax rate' is the tax rate applied to an individual's income within a certain bracket. The video explains that this rate only applies to the income within that bracket, not the entire income, which is a key point in debunking the misconception about tax deductions and brackets.

💡Financial advice

The video script warns against taking 'financial advice' from people who are not financially successful themselves, emphasizing the importance of seeking guidance from credible sources. This is a recurring theme throughout the video, as it critiques common but misguided financial strategies.

💡Mortgage

A 'mortgage' is a loan for the purchase of property, on which the borrower pays interest over time. The video discusses the common belief that keeping a mortgage for the tax benefits is advantageous, but argues that this is generally not the case due to the standard deduction.

Highlights

Maritza from Maryland shares her journey to becoming debt-free after attending a financial class.

The speaker emphasizes not taking financial advice from those who are financially unsuccessful.

Under the current tax code, most Americans will take the standard deduction rather than itemizing, including mortgage interest.

The standard deduction has doubled under recent tax laws, making it unlikely for people to itemize and claim mortgage interest deductions.

The speaker refutes the common misconception that paying off a mortgage will lead to higher taxes due to losing the mortgage interest deduction.

A detailed explanation is provided on how the standard deduction works and why it negates the need for itemizing mortgage interest.

The speaker uses a hypothetical $200,000 mortgage at 5% interest to illustrate the tax deduction's actual impact.

The actual tax savings from a mortgage interest deduction are much smaller than people believe, often only a few percentage points.

The speaker advises against keeping a mortgage for the sake of a tax deduction, as it's not financially savvy.

A study of millionaires revealed that a paid-off home and steady retirement plan investments are common wealth-building strategies.

The speaker shares personal anecdotes about past misconceptions in the real estate business regarding mortgages and tax deductions.

The importance of understanding the marginal tax bracket system is highlighted to debunk myths about tax implications of paying off mortgages.

The speaker calls out the flawed logic of sacrificing financial freedom for a minimal tax deduction.

A strong recommendation is made to pay off mortgages as soon as possible to achieve financial independence.

The speaker critiques the advice of keeping a mortgage for tax benefits as being financially illiterate.

The transcript concludes with a firm stance on the importance of mathematical and factual understanding in financial decisions.

Transcripts

maritza is in Maryland and says Dave my

husband and I are on our way to being

debt-free whoo

we took your class earlier this year

remember you're saying to pay off the

house last when I talk to people about

paying off my house they say it's not a

good idea speaking of themselves because

of being placed in another tax bracket

and having to pay high taxes is this so

well or it's a one rule is don't take

financial advice from broke people or

dying at dieting advice from fat people

so they said and I heard are the worst

financial planning firm out there now

let's talk about why okay number one

under the current tax code enacted two

years ago a married couple has a $24,000

standard deduction that means unless

your write offs on your house house

interest and your charitable giving and

other write-offs that you have exceed

$24,000 you will likely take the

standard deduction on your taxes now

before that that's a trump enacted tax

law it increased the standard deduction

by double the amount that you can take

as a standard deduction if you don't

have write-offs in excess of that you

would take that now before that eighty

percent of Americans did not itemize

meaning they took the standard deduction

now the standard deduction in the last

two years has doubled translation almost

no one it's going to be under well under

10% of Americans probably under 5% of

Americans will actually itemize on their

taxes you have to run a small business

or make incredible interest payments or

incredible charitable giving to bother

to itemize because your standard

deduction is so freaking big translation

almost no one actually takes the tax

deduction on their house because they

take the standard deduction so this is

complete BS it's all theory and it's all

somebody talking over the Thanksgiving

dinner that has

no freaking idea what they're saying

because they haven't ever taken a

standard had never done an itemized tax

return they take standard deduction

every year and they look at you and say

but I'm not paying off my house because

I'll lose the tax deduction which they

didn't get the tax deduction but they're

too moronic to actually understand how

this really works and they're giving you

advice so let's say that you are one of

the very few people that actually does

take the tax deduction on your house

let's run some numbers everybody get

your calculator ready here we go

let's pretend you out of $200,000

mortgage I make it easy at 5% 5% of

200,000 is $10,000 does that sound right

everybody say yes that means if you had

a $10,000 interest payment you paid that

year if you're one of the few unicorns

that actually does do an itemized demise

tax return and does take the deduction

on your interest rate on your home you

didn't take the standard deduction

you're one of the few that means you

would actually have a $10,000 tax

deduction because you paid the mortgage

company $10,000 in interest is that

correct everybody say yes and so what

that means is not that you take $10,000

off of your taxes it means that you

reduce your taxable income by $10,000 so

instead of being taxed on 80,000 your

text on 70,000 which means not that you

saved $10,000 on your taxes it means you

saved your tax rate on the $10,000 and

so let's walk back through that let's

pretend this is a couple making 80,000

bucks a year putting a twenty two

percent tax bracket if you're a twenty

two percent tax bracket and you have a

ten thousand dollar tax write-off that

saves you $2,200 on your taxes if you're

one of the handful of people who

actually itemize and almost no one does

have I said that before so what you did

if you follow your genius friends

suggestions is you send countrywide

mortgage $10,000 because you did God

forbid you'd pay off your mortgage and

lose the tax deduction so you sing

countrywide mortgage $10,000 why so that

you could keep from sending the

government two thousand two hundred

people who trade ten thousand four two

thousand two hundred are not called

sophisticated people these are called

morons

don't trade 10,000 for two hundred two

thousand two hundred dollars it's a bad

trait trading the dollar for a quarter

is a bad idea and so when you keep a tax

deduction in order for the opportunity

to give someone money in order to save a

quarter and you give someone a dollar in

order to save a quarter you're not

sophisticated your math challenged and

if your CPA is stupid enough in a few of

them are to tell you to keep your

mortgage because of your tax deduction a

CPA that can't add is not a good one get

a new CPA use these two words you're

fired

and don't listen to people who have

theories that don't exist in the real

freaking world and when you do actually

put the nominal facts and mathematics to

the theory it makes you look ridiculous

now when I first got in the real estate

business I was stupid I was 18 years old

and you know what they told us they told

us to get everybody's bigger mortgages

we could get them because they get the

tax deduction and you know what I told

everybody the same stupid thing

everybody tells everybody get you a big

ol mortgage because you get the tax

deduction now certain times in the last

40 years that I've had my real estate

license that's been more true than

others of the tax you actually did get

the tax deduction the irony of this is

one more time I'll repeat less than 5%

of Americans are actually going to get

the tax deduction on their mortgage

interest and yet everyone keeps their

stupid mortgage because they're broke

brother-in-law who has an opinion tells

them that they need to keep their

mortgage because anybody buddy knows you

don't pay off your mortgage because of

the tax deduction that you never get and

if you do get it you're trading a dollar

for a quarter y'all getting hot done

this is this is dumb this is seriously

dumb so maritza in Maryland the moral of

the story is hey don't listen to broke

people of our money be pay off your

mortgage as soon as possible

oh let me give you one other piece of

actual data we did the largest study of

millionaires ever done for Chris Hogan's

book every day millionaires the

millionaires that we interviewed had to

if they had a net worth of under 5

million dollars 1 million to 5 million

which is not bad by the way considering

most Americans can't even pay their

bills if you have a net worth of between

one and five million dollars our

in-depth airtight detailed research

shows that that typical millionaire has

two primary sources of wealth almost

every time we talk to one of them it was

their 401k and they're paid off home

that made them a millionaire so they're

sitting on a million and a half net

worth with a $500,000 paid for house and

a million dollars in their 401k so

they're worth a million and a half they

got no debt that was a very often that

was the ratios that we heard in that

research over and over and over and over

again so in other words two of the

primary places that people get their

first 1 to 5 million dollars in their

wealth building plan is a paid off home

and investing steadily in mutual funds

and your retirement plan kinda sounds

like what we've been teaching for 30

years around here so that's what you

need to do when I talk to people about

paying off my house they say it's not a

good idea because of being placed in

another tax bracket well it's not gonna

place you another the tax bracket if

you're not taking the tax deduction and

another tax bracket does not affect oh

by the way we have a marginal tax

bracket system do you don't know what

that means

it means if you're on a 22 percent tax

bracket it does not mean you pay twenty

two percent of all of your income on

taxes it means the last dollar of your

income was taxed at 22 percent but you

worked your way all the way up through

the brackets there's a certain amount

that is not taxed at all then there's a

mount taxed at 10% no taxed at 15

percent mount taxes 17 percent of Mount

Texas so on up until you get the 22

percent so you don't take your income

times 22 percent to get your taxes

people making $80,000 do not pay 22

percent of their income in taxes they

pay about 7 or 8 percent of their income

in taxes so but the last dollar that

we're talking about so our calculation

was correct that you would have saved on

that tax deduction would

22% so I gave you the most generous

possible analysis in that map and it

still gives you a mic drop answer