MORTGAGE INTEREST DEDUCTIONS: Since it’s tax season, it’s probably good to have a reminder that mortgage interest isn’t always as deductible as you think it is. My Money Blog gives some good points in the course of a longer post discussing whether or not it’s wise to prepay a mortgage:
- In order for paying off your mortgage at 4% to get you the same net return as an investment earning 4%, the assumption is that your mortgage interest is 100% tax-deductible while your potential investment is to be taxed at your ordinary income tax rate. That way, the taxes cancel out.
- Mortgage interest is only tax-deductible if you itemize. However, the standard deduction in 2013 is $12,200 for married filing joints and $6,100 for single filers. This is the amount that anyone can deduct. Let’s say your mortgage is for $250,000 and the interest rate is 4%. That’s $10,000 in interest annually. So far, the married folks have no tax benefit at all! You would need a lot of other deductions like state income tax, property tax, and charitable contributions to push you over the hump. For example if you have $7,200 in other deductions, then only $5,000 of your $10,000 in mortgage interest is actually saving you anything extra in taxes. I call this 50% deductibility.
- In addition, as you pay down your mortgage over time, your interest paid will decrease and make it gradually harder to itemize.
- On the flip side, if your investments are stocks, then your long-term capital gains tax rate may be lower than your ordinary income tax rate.
- The ability to avoid some taxes and thus increase your effective return is also why it is generally advised that you shouldn’t pay extra towards your mortgage unless you’ve maximized your tax-advantaged accounts (401k, IRA) and definitely any 401k employer match. An employer match is often a 50%-100% instant return, so you definitely can’t leave that on the table.
- Bottom line: People think their mortgage interest is saving them lots of money in taxes, but it often isn’t. Each person should add up their other deductions and figure out their own percentage of deductibility.
A SELF-EMPLOYMENT SUCCESS STORY: We’ve written a lot about issues with college and graduate school, but maybe grads just aren’t thinking outside the box enough. Case in point: an Oklahoma City panhandler, Shane Speegle claims to have made $60,000 last year. As the article points out:
A $60,000 salary puts Speegle in the average-income realm of architects, appraisers and computer programmer analysts, according to careerbuilder.com. It also puts Speegle comfortably above the U.S. median household income of between $49,434 and $51,413, BusinessInsider pointed out.
The best line of the article comes from Speegle himself: “I’m lazy and I made $60,000.” The man is living his dream, folks.
POINT VALUATION: Lucky at One Mile At A Time has a good post discussing valuation of points in the Amex Membership Rewards, Chase Ultimate Rewards, and Starwood programs. His estimates are 1.8 cents, 1.8 cents, and 2.2 cents per points respectively.
Amex has gone up slightly in his opinion thanks to the ability to redeem for Singapore Airlines suites (A double bed on a plane? Oh, yes.) and transfer bonuses to the awesome British Airways Avios program. UR remains valuable on account of United and Hyatt redemptions, while Starwood retains its value despite the recent hotel devaluation since they can be transferred into a great selection of airlines. For example, you can spend 70,000 Starwood points to go roundtrip from New York to Dubai on Emirates business class by redeeming Japan Airlines miles–and Starwood is JA’s only major transfer partner.
Frugal Travel Guy also has some new point valuation work up. Conclusions: Starwood points are worth 2.3 cents, while Hyatt points are worth 1.9 cents.
A BLOG WORTH CHECKING OUT: Thanks to a poster at Fatwallet, we’ve discovered Oddball Stocks, which we’ve enjoyed reading so far. Blogger Nate Tobik does high-quality write-ups of off-the-beaten-path stocks you’re not likely to hear about anywhere else. If you’re into that kind of thing, give it a look.