Will Paying Off Your House Mean Higher Taxes? - Dave Ramsey Rant
Summary
TLDRIn 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
💡 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.
🏠 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.
Mindmap
Keywords
💡Debt-free
💡Tax deduction
💡Standard deduction
💡Itemized deductions
💡Mortgage interest
💡Tax bracket
💡Millionaires
💡401k
💡Marginal tax rate
💡Financial advice
💡Mortgage
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
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