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While the tax deduction for mortgage interest can be valuable, you can’t forget that you’re paying an interest-carrying debt. “If someone offered you a guaranteed risk-free 5 percent rate of return, would you take it?” Koch asked.
People tend to misjudge the financial benefits of tax deductions. If you take the time to do the math, you may be surprised of their real value.
Granted, our household doesn’t have the largest mortgage in the universe, but our tax bill was reduced a mere $645 due to the mortgage interest deduction. That’s peanuts considering how much we paid to live there in 2013. Remember: It rarely makes sense to do something purely for a tax break.
Donate early and often. Like so many families, we wait until the last minute to make our charitable contributions, and our bank balances strain to cover the pressure of donations and holiday spending. This year, one of our primary credit cards expired in mid-November and we never got around to updating it, leaving organizations that count on our support out in the cold. It makes far more sense to spread donations throughout the year, especially if you’re like us and aim to contribute a larger percentage of your income to charity.
Revisit your withholding. Things change. Taxes change. Last year, writing a book upped my income. Turns out I didn’t withhold enough taxes throughout the year, and was hit with a $30 underpayment penalty. It could have been a lot worse. The only reason I mention it is to say that calculating your tax withholding is a pain, but if you haven’t done it in a while, do so while your tax return is handy. You’ll need your most recent pay stub too. Most tax prep programs have a withholding wizard. Or head to the IRS site at apps.irs.gov/app/withholdingcalculator/.
If you owe … don’t forget to pay. We filed our taxes already, but why pay the bill before April 15? Just don’t forget to pay the IRS.
Kara McGuire is a personal finance expert and consumer strategist for CEB. Send questions, comments or future column ideas to firstname.lastname@example.org.