People are always looking to save money, but sometimes we use the notion of saving money to justify some large purchase or decision that we want to make anyway, when the reality is that you’ll probably end up NOT saving money as a result of your purchase. It’s important to differentiate between real money savings and perceived money savings. Here are some common examples of cases where people think they’re saving money when they often aren’t:
- Buying a Home for the Mortgage Interest Deduction – There are many reasons to buy a home over renting, but one of them should not be for the mortgage interest deduction. This is an oft-misunderstood benefit to homeowners. In theory, it sounds nice to get a deduction on your tax return just for paying your mortgage, but many people don’t consider that below a certain income level, you don’t even really get the benefit of the deduction! This is because of the standard deduction we all get anyway, as well as the tiered income tax structure in the US. The fact is about half the families in the country don’t end up having a federal income tax liability, so there’s no tax burden to even offset with the deduction to begin with! If you’re buying for other reasons, a home can be a great lifestyle choice, but it’s not worth considering this modest deduction in your decision.
- Being Overly Aggressive with Tax Deductions – I have some friends that have a small side business just for the purposes of taking tax deductions. They credit their great “creative” accountant with coming up with all kinds of ways to save money on their tax returns. The problem is, they’re often not saving what they think and even worse, they are putting themselves at a higher risk for an IRS audit, which can be a huge problem. Take the home office deduction for instance. Aside from being a huge red flag for the IRS, you’re only really deducting the “portion” of your home comprised by the office, so say, 10 percent. After that, you only get the benefit of your tax rate times that 10 percent, so if you’re in the 25 percent tax bracket, it’s like getting 2.5 percent off your home heating, cooling and mortgage bills. That’s not much for the risk you’re taking. Add to that that there’s a depreciation component, which has to be paid back if you sell your home since you took depreciation along the way. These are all somewhat complicated tax calculations best performed by an accountant, but before you try to get creative with starting a side business just for writing off routine expenses, beware that you may be opening yourself up to increased risk for very little benefit.
- Daily Deals – With the explosion of social daily deal sites, it can be tempting to want to hop on the latest deal but this can often be a poor use of your hard-earned money. Why? For one, the deals often come with fine print ranging from anything from “weekday only” uses to expiration dates that don’t allow you enough time to use the deal. Additionally, this is impulse buying for something you may not have planned on doing anyway. Finally, some patrons complain about their experience because the business owners treat the daily deal customers like second-rate citizens. They know that many of these people are different than their routine customers and only bought the deal for a one-time use and won’t be returning customers; there’s also a perception that they’re cheap in general so tips may not be as large. At the end of the day, with so many things stacked against your experience, is it really worth it?